TITLE:
Thought Experiment: Marginal Cost versus John M. Clark’s Workable Competition Pricing
AUTHORS:
Gerald Aranoff
KEYWORDS:
Manufacturing, Business Cycle, Peak-Load Pricing, Cutthroat Competition, Workable Competition, Equilibrium, Cost Curves
JOURNAL NAME:
Modern Economy,
Vol.11 No.11,
November
17,
2020
ABSTRACT: This article compares numerical results for an
original model of an industry using marginal cost pricing versus workable
competition pricing with fluctuating demand with two alternative technologies.
The article is a thought experiment in economics, carried out only in the
imagination. The article presents a detailed numerical model of a basic
industry, cement manufacturing with large numbers of sellers, cement
manufacturers, and large numbers of buyers, the construction industry,
operating independently with full knowledge of supply and demand conditions. In
the model cement plants have linear total cost functions with absolute capacity
limits. The article considers two alternative technologies: 1) plantL old plants with low fixed
costs and high marginal costs and 2) plantK new plants with high fixed costs and low marginal costs. This study argues in
support of John M. Clark (1884-1963)
workable competition theory in contrast to marginal cost competition theory.
The study examines likely equilibrium conditions under two alternate pricing
systems: a) short-run marginal cost pricing and b) John M. Clark’s concept of
workable competition. Workable competition raises prices above marginal costs
in the off peak period and lowers prices in the peak periods. The study assumes
frequency of off periods 6/7 and frequency of peak periods 1/7. The study
claims, under the assumptions of the model, workable competition pricing add to consumer surplus over
the cycle.