When Excessive Consumption Is Rational

Richard Romano

American Economic Review, 1991, vol. 81, issue 3, 553-64

Abstract: If average cost is everywhere above market demand, it is usually argued that the nondiscriminating firm will shut down, although the first-best outcome may dictate production. In this setting, it is shown that there is often a Nash equilibrium in consumption that will keep the firm producing. Selfish consumers engage in excessive (beyond demand) consumption to keep the firm in business and to protect their surpluses. This is shown to be true in a simple model with perfect information and also in a more realistic model in which consumers are uncertain about the firm's costs. Copyright 1991 by American Economic Association.

Date: 1991
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