MODELING SPATIAL PRICE-COMPETITION - MARXIAN VERSUS NEOCLASSICAL APPROACHES

Regional political economy is an approach to economic geography that c an transcend the current dualism of a new neoclassical economic geogra phy and a new cultural economic geography. We apply this approach to m odeling the pricing strategies of firms competing in a geographically extensive market, critically assessing the validity of neoclassical th eoretical claims about firm behavior. The neoclassical claim that firm s should maximize total profits when setting prices is inconsistent wi th empirical evidence that, in practice, firms utilize the Marxian goa l of maximizing the rate of profit. Regional political economy can exp lain why firms would choose to employ rate-of profit pricing as a comp etitive strategy. In disequilibrium, uncertainty and sunk costs force firms into pricing strategies that, plausibly, should be evaluated on rate-of-profit grounds. Even in equilibrium, where neoclassical theory is presumed to be valid, economically rational firms in spatial marke ts should prefer the economic goal of maximizing the rate of profit wh en setting prices.