Thought Experiment: Marginal Cost versus John M. Clark’s Workable Competition Pricing

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.