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

David de Meza and Francesco Reito

Journal of Economic Theory, 2020, vol. 188, issue C

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)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:188:y:2020:i:c:s002205312030065x

DOI: 10.1016/j.jet.2020.105067

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