The Two Price Systems in the Copper Industry

Abstract

During three periods from the end of World War II through 1970, some or all of the major copper producers held their price below the level that would have cleared the market and rationed their available supplies. The central question posed by the two price systems is that of why any of the major producers would ever choose to ration. Bound up with this issue is the question of why several of the major producers rationed at times when the others did not. Two circumstances in which rationing may be profitable are identified. First, it is shown that rationing may be a profitable response to a large, unanticipated increase in demand if there is long-run substitution in demand; capacity cannot be quickly expanded; marginal cost is increasing; and price discrimination is infeasible. Second, it is shown that a partially integrated copper producer may find rationing profitable as a means of partially achieving the effects of price discrimination given that price discrimination itself is infeasible. Taken together, these motives for rationing provide an internally consistent set of hypotheses that account for the broad features of the two price systems. It is suggested on the basis of structural characteristics of the industry that these hypotheses are valid. However, the argument is not conclusive, so it can be claimed only that the results obtained provide a plausible explanation of the two price systems.