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Regulating Availability with Demand Uncertainty

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  • Roland Strausz

Abstract

I evaluate a new 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 undermine the regulation's rationale by claiming that rationing is due to demand uncertainty. This paper shows that under demand uncertainty the regulation has ambiguous welfare effects. Effectively, it raises production, which, under imperfect competition, tends to be beneficial. However, the regulation overshoots and decreases welfare if it requires availability for a state of high demand that is relatively unlikely. In this case more sophisticated regulation is required. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2007.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 8 (2007)
Issue (Month): (02)
Pages: 107-121

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Handle: RePEc:bla:germec:v:8:y:2007:i::p:107-121

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  1. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
  2. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  3. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  4. Bester, Helmut, 1994. "Random Advertising and Monopolistic Price Dispersion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 545-59, Fall.
  5. Howard P. Marvel & Raymond Deneckere & James Peck, 1995. "Demand Uncertainty, Inventories, and Resale Price Maintainance," Working Papers 019, Ohio State University, Department of Economics.
  6. Smith, Kenneth R., 1969. "The effect of uncertainty on monopoly price, capital stock and utilization of capital," Journal of Economic Theory, Elsevier, vol. 1(1), pages 48-59, June.
  7. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter.
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Cited by:
  1. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.

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