Globalization: Alternative Pricing in a Peak-Load Pricing Model

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.