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When Excessive Consumption Is Rational

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  • Romano, Richard E

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 81 (1991)
Issue (Month): 3 (June)
Pages: 553-64

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Handle: RePEc:aea:aecrev:v:81:y:1991:i:3:p:553-64

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Cited by:
  1. Jen Shang & Rachel Croson, 2009. "A Field Experiment in Charitable Contribution: The Impact of Social Information on the Voluntary Provision of Public Goods," Economic Journal, Royal Economic Society, vol. 119(540), pages 1422-1439, October.
  2. Buraschi, Andrea & Cornelli, Francesca, 2002. "Donations," CEPR Discussion Papers 3488, C.E.P.R. Discussion Papers.
  3. Smith, Vincent H. & Kehoe, Michael R. & Cremer, Mary E., 1995. "The private provision of public goods: Altruism and voluntary giving," Journal of Public Economics, Elsevier, vol. 58(1), pages 107-126, September.
  4. Romano, Richard & Yildirim, Huseyin, 2001. "Why charities announce donations: a positive perspective," Journal of Public Economics, Elsevier, vol. 81(3), pages 423-447, September.

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