Too much waste, not enough rationing: the failure of stochastic, competitive markets

David de Meza and Francesco Reito

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: There are good reasons why sellers often post prices before the realization of demand shocks. We study whether equilibrium prices chosen ex ante coincide with the ex-ante prices that maximize expected aggregate surplus. The main result is that even in the competitive limit there is a divergence. Waste is excessive and entry decisions are distorted. The problem is that for competitive firms to sell in low-demand states involves a costly sacrifice of high-state revenue.

Keywords: stochastic demand; rationing; waste; efficiency (search for similar items in EconPapers)
JEL-codes: D61 D81 H23 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-07-01
New Economics Papers: this item is included in nep-com, nep-cwa, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Economic Theory, 1, July, 2020, 188. ISSN: 0022-0531

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Related works:
Journal Article: Too much waste, not enough rationing: The failure of stochastic, competitive markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:104084

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