Demand uncertainty and efficiency

Benjamin Eden ()

No 14-00011, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: I use a flexible price version of the Prescott (1975) “hotels” model to study a dynamic model that allows for storage. The formulation follows the standard competitive analysis tradition with a non-standard definition of markets: The set of markets that open depends on the state of demand. I use three planner's problems to characterize various efficiency concepts that are used in the literature, but focus on the problem of a “weak” planner that faces the same constraints as the sellers in the model. From the point of view of the “weak” planner, the equilibrium outcome is efficient if the probability of becoming active is the same for all buyers. In general, the equilibrium outcome is not efficient from the point of view of a planner that has more information than the sellers in the model except for the case in which the costs of delaying trade are not important. The cost of delay is also relevant for price dispersion: Lower cost of delays may lead to lower price dispersion.

Keywords: Price dispersion; demand uncertainty; efficiency; sequential trade; inventories; costs of delaying trade; price rigidity (search for similar items in EconPapers)
JEL-codes: D0 (search for similar items in EconPapers)
Date: 2014-10-06
New Economics Papers: this item is included in nep-com and nep-ind
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