Regulating Availability with Demand Uncertainty

Roland Strausz ()

Departmental Working Papers from Freie Universität, Fachbereich Wirtschaftswissenschaften

Abstract: I evaluate German regulation that requires retail discounters to guarantee the availability of their products in bargain sales. The regulation is meant to prevent loss leaders. Retailers however claim that rationing is due to demand uncertainty and thereby undermine the regulation's rationale. Indeed, demand uncertainty explains empirical observations better than a theory of loss leaders. This paper shows, however, that also under demand uncertainty the regulation has positive effects. Ultimately, it raises production, which, under imperfect competition, is beneficial. A strict regulation overshoots its goal when high demand is relatively unlikely. In this case more sophisticated regulation is required.

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Related works:
Journal Article: Regulating Availability with Demand Uncertainty (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:bef:lsbest:019

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