Modeling Spatial Price Competition: Marxian versus Neoclassical Approaches

Abstract

Regional political economy is an approach to economic geography that can transcend the current dualism of a new neoclassical economic geography and a new cultural economic geography. We apply this approach to modeling the pricing strategies of firms competing in a geographically extensive market, critically assessing the validity of neoclassical theoretical claims about firm behavior. The neoclassical claim that firms should maximize total profits when setting prices is inconsistent with empirical evidence that, in practice, firms utilize the Marxian goal of maximizing the rate of profit. Regional political economy can explain why firms would choose to employ rate-of-profit pricing as a competitive strategy. In disequilibrium, uncertainty and sunk costs force firms into pricing strategies that, plausibly, should be evaluated on rate-of-profit grounds. Even in equilibrium, where neoclassical theory is presumed to be valid, economically rational firms in spatial markets should prefer the economic goal of maximizing the rate of profit when setting prices.