The Relationship between Short-Run Pricing and Investment Timing: The Port Pricing and Expansion Example

A dynamic program for generating monopoly profit-maximizing pricing and expansion policies for a port facing a continuously shifting, price-dependent de-mand and a series of discrete investment alterna-tives is described. A related algorithm for gener-ating the societal income maximizing policy is pre-sented. These models demonstrate the coupling be-tween short-run pricing and investment timing. In contrast to much of the literature in the area, they ar-gue that under all but pathological situations, there is no “structural ” conflict between short-run allocative efficiency (marginal cost pricing) and long-run al-locative efficiency (attracting the proper level of cap-ital).