Efficiency and marginal cost pricing in dynamic competitive markets with friction
AbstractThis paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost. If friction is present, no matter how small, then the market price fluctuates between zero and the "choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The distribution of the gains from trading in an efficient allocation may be skewed in favor of the supplier, although every player in the market is a price taker.
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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 5 (2010)
Issue (Month): 2 (May)
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Web page: http://econtheory.org
Dynamic general equilibrium model with supply friction; choke-up price; marginal production cost; welfare theorems;
Find related papers by JEL classification:
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
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