TITLE:
A Model of Manufacturers and Buyers of Cars over the Business Cycle Illustrating Competitive Manufacturing
AUTHORS:
Gerald Aranoff
KEYWORDS:
Manufacturing, Competition, Business Cycle, Marginal-Cost Pricing, Output-Rate Flexibility
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.7,
August
5,
2014
ABSTRACT: We illustrate
competitive manufacturing with an original theoretical model of manufacturers
and buyers of cars over a business cycle that have peak and off-peak demand
periods. There are two types of plants manufacturing cars, plantK and plantL, each having
linear total costs with absolute capacity limits. PlantK operates with low VC and high FC by being capital
intensive. PlantK is output-rates
rigid since it produces throughout the business cycle and always at capacity.
PlantL operates with low FC and high VC by relying on outsourcing major components and parts. PlantL is output-rates flexible
since it produces only in the peak-demand periods. We show results under SRMC pricing. Then we examine an
alternate arrangement which increases demand irregularity. We show, under
conditions of the model, that the added cost to supply irregular demand should
be small because of the low FC of
plantL. We show, under the
conditions of the model, that the added gain in consumer surplus to have
irregular demand supplied should be large because consumers will have more
available for the peak periods. The main policy implication of this theoretical
model—for regularly recurring cycles—is to urge focus, even in the off-peak
periods, on adequate capacity for the peak periods.