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An Equilibrium Theory of Rationing

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Author Info
Gilbert, Richard
Klemperer, Paul

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Abstract

Setting 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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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 805.

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Date of creation: Jul 1993
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Handle: RePEc:cpr:ceprdp:805

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Related research
Keywords: Rationing; Sunk Costs;

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Find related papers by JEL classification:
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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Rotemberg, Julio J & Summers, Lawrence H, 1990. "Inflexible Prices and Procyclical Productivity," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 851-74, November. [Downloadable!] (restricted)
  2. Martin L. Weitzman, 1977. "Is the Price System or Rationing More Effective in Getting a Commodity to Those Who Need It Most?," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 517-524, Autumn. [Downloadable!] (restricted)
    Other versions:
  3. Levin, Dan & Smith, James L, 1994. "Equilibrium in Auctions with Entry," American Economic Review, American Economic Association, vol. 84(3), pages 585-99, June. [Downloadable!] (restricted)
  4. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November. [Downloadable!] (restricted)
  5. Margaret E. Slade, 1991. "Strategic Pricing with Customer Rationing: The Case of Primary Metals," Canadian Journal of Economics, Canadian Economics Association, vol. 24(1), pages 70-100, February. [Downloadable!] (restricted)
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  6. Stole, Lars A., 1994. "Information expropriation and moral hazard in optimal second-source auctions," Journal of Public Economics, Elsevier, vol. 54(3), pages 463-484, July. [Downloadable!] (restricted)
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  8. Png, I P L, 1991. "Most-Favored-Customer Protection versus Price Discrimination over Time," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1010-28, October. [Downloadable!] (restricted)
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