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

De Meza, David and Reito, Francesco (2020) Too much waste, not enough rationing: the failure of stochastic, competitive markets. Journal of Economic Theory, 188. ISSN 0022-0531

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Identification Number: 10.1016/j.jet.2020.105067

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.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-e...
Additional Information: © 2020 Elsevier Inc.
Divisions: Management
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency; Cost-Benefit Analysis
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Date Deposited: 17 Apr 2020 15:54
Last Modified: 06 Oct 2020 13:03
URI: http://eprints.lse.ac.uk/id/eprint/104084

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