Thought Experiment Transfer Pricing Alternatives: Supporting John M. Clark’s Workable Competition Pricing

 The object of this study is to analyze numerical results for a thought experiment comparing transfer pricing alternatives of a hypothetical corporation having a manufacturing division making a single product and a marketing division that sells that product. Each division seeks to maximize its own profits. The marketing division faces hypothetical fluctuating demand fluctuations, prosperity versus depression, for a final product that is semi-perishable costly to store such as cement. The manufacturing division has two alternate technologies, high fixed cost versus low fixed costs. The transfer pricing alternatives: A) short-run marginal cost pricing high price volatility over the business cycle versus B) John M. Clark’s workable competition pricing low price volatility over the business cycle. The manufacturing division plants have linear total cost functions with absolute capacity limits. In opposition to perfect competition theory, this study argues in support of John M. Clark (1884-1963) workable competition theory. The thought experiment shows a gain in consumer surplus and to corporate profits over the cycle with transfer pricing John M. Clark’s workable competition theory. This article offers reasons for this gain. This thought experiment should inspire other researchers to do similar hypothetical thought experi-ments.

Author(s) Details:

Gerald Aranoff,
Ariel University, Ariel 40700, Israel.

Please see the link here: https://stm.bookpi.org/CABEF-V9/article/view/9295

Thought Experiment Cement Industry Demand Fluctuations: Supporting John M. Clark's Workable Competition Pricing | Chapter 08 |New Innovations in Economics, Business and Management Vol. 7

 The purpose of this research 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 cost, using marginal cost pricing versus John M. Clark's workable competition pricing, using marginal cost pricing versus John M. Clark's workable competition pricing. The article is an economics thought experiment that is only carried out in the mind. The article presents a detailed numerical model of a basic industry, cement manufacturing, with a large number of sellers, cement factories, and large numbers of buyers, the construction industry, all of whom work independently and are fully aware of supply and demand conditions. The model's cement plants have linear total cost functions and absolute capacity constraints. The article contrasts two technologies: 1) old plants with low fixed costs but high marginal costs, and 2) new plants with high fixed costs but low marginal costs. This study argues in favour of John M. Clark's (1884-1963) practicable competition theory, which is opposed to marginal cost competition theory. The study investigates the likely equilibrium conditions under two pricing systems: A) short-run marginal cost pricing and B) John M. Clark's practical competition concept. Workable competition raises prices above marginal costs in the off-peak period, but lowers prices in the peak period. The study assumes a 6/7 off period and 1/7 peak period frequency. Workable competition pricing, according to the paper, increases consumer surplus over time under the model's assumptions. Under the model's assumptions, the study claims that gains in consumer surplus from workable competition pricing in high-demand periods, though infrequent (1/7), will outweigh losses in consumer surplus from workable competition pricing in low-demand periods, which are more frequent (6/7).

Author(S) Details

Gerald Aranoff
Ariel University, Ariel 40700 Israel.

View Book:- https://stm.bookpi.org/NIEBM-V7/article/view/6393