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Globalization: Alternative Pricing in a Peak-Load Pricing Model

DOI: 10.4236/me.2017.87062, PP. 888-896

Keywords: Globalization, Manufacturing, Business Cycle, Marginal-Cost Pricing, Output-Rate Flexibility

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Abstract:

We discuss globalization and the current recession in manufacturing and construction. We present a theoretical model of globalization, of two countries, X and Y, each with open-market systems domestically and internationally. We compare two pricing policies in each country: short-run marginal cost, SRMC, versus prices fixed, \"\", over the business cycle. We present a proposition and proof. We give a detailed numerical example with graphs for each country. The main result is that \"\"?over the business cycle increases the volatility of Q demand over the cycle and increases consumer surplus in both countries under certain conditions. The numerical example shows a drawback of SRMC pricing under demand fluctuations—that the required price in high-demand times to balance accounts becomes extremely high. Consumers are better off with \"\", paying a small increase over SRMC in the off-peak, 6/7th of the time, to avoid the extremely large required price of SRMC in the peak times, because it’s only 1/7 of the time. The surprising point is that though peak times are infrequent, the prices and quantities at peak times determine which pricing arrangement is better for consumers.

References

[1]  Clark, J.M. (1923) Studies in the Economics of Overhead Costs. The University of Chicago Press, Chicago.
[2]  Aranoff, G. (1991) John M. Clark’s Concept of Too Strong Competition and a Possible Case: The U.S. Cement Industry. Eastern Economic Journal, 17, 45-60.
[3]  Crew, M.A., Fernando, C.S. and Kleindorfer, P.R. (1995) The Theory of Peak-Load Pricing: A Survey. Journal of Regulatory Economics, 8, 215-248.
https://doi.org/10.1007/BF01070807
[4]  Clark, J.M. (1961) Competition as a Dynamic Process. The Brookings Institution, Washington DC.

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