A Model of Manufacturers and Buyers of Cars over the Business Cycle Illustrating Competitive Manufacturing

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, plant K and plant L , each having linear total costs with absolute capacity limits. Plant K operates with low VC and high FC by being capital intensive. Plant K is output-rates rigid since it produces throughout the business cycle and always at capacity. Plant L operates with low FC and high VC by relying on outsourcing major components and parts. Plant L 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 plant L . 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.