Thought Experiment Cement Industry Demand Fluctuations: Supporting John M. Clark's Workable Competition Pricing

Abstract

The object of this study is to compare numerical results for a hypothetical numerical model of a cement industry facing demand fluctuations, high versus low, with alternate technologies, high fixed cost versus low fixed costs, using marginal cost pricing versus John M. Clark’s workable competition pricing. The article is a thought experiment in economics that is only carried out in the imagination. The article gives a detailed numerical model of a basic industry, cement manufacturing, with a big number of sellers, cement factories, and large numbers of consumers, the building industry, each working independently and fully aware of supply and demand conditions. Cement plants in the model have linear total cost functions and absolute capacity restrictions. The article compares two alternative technologies: 1) old plants with low fixed costs but high marginal costs, and 2) new plants with high fixed costs but low marginal costs. In opposition to marginal cost competition theory, this study argues in favour of John M. Clark's (1884-1963) practicable competition theory. The study looks at the likely equilibrium circumstances under two different pricing systems: A) short-run marginal cost pricing and B) John M. Clark's practical competition notion. In the off-peak period, workable competition raises prices above marginal costs, but in the peak period, it decreases prices. The study assumes a frequency of 6/7 off periods and 1/7 peak periods. The paper claims that, under the model's assumptions, workable competition pricing increases consumer surplus over time. The study claims, under the assumptions of the model, that the gains in consumer surplus with workable competition pricing in high-demand periods though infrequent (1/7), will outweigh the loses in consumer surplus with workable competition pricing in low demand periods though frequent (6/7).