An Equilibrium Theory of Rationing
AbstractSetting a price that results in rationing may be optimal for a seller whose customers must make a specific investment to be able to use his product. Although rationing results in ex post inefficiency, the resulting distribution of ex post surplus compensates consumers for their transaction-specific costs, while allowing the seller to earn higher profits than with market-clearing prices. Committing to a single price, and rationing if there is excess demand, can be more profitable than setting state-contingent prices that always clear the market. Variants of our basic model provide insights into overbooking practices by the airline industry, declining price paths combined with rationing to favour loyal customers, discriminatory pricing arrangements, second-sourcing, and sticky wages.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 805.
Date of creation: Jul 1993
Date of revision:
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Other versions of this item:
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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