TITLE:
Globalization: Alternative Pricing in a Peak-Load Pricing Model
AUTHORS:
Gerald Aranoff
KEYWORDS:
Globalization, Manufacturing, Business Cycle, Marginal-Cost Pricing, Output-Rate Flexibility
JOURNAL NAME:
Modern Economy,
Vol.8 No.7,
July
19,
2017
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.