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The Theory of Allocation and Its Implications for Marketing and Industrial Structure

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  • Dennis W. Carlton

Abstract

This paper identifies a cost of using the price system and from that develops a general theory of allocation. The theory explains why a buyer's stochastic purchasing behavior matters to a seller. This leads to a theory of optimal customer mix much akin to the theory of optimal portfolio composition. It is the job of a firm's marketing department to put together this optimal customer mix. A dynamic pattern of pricing related to Ramsey pricing emerges as the efficient pricing structure. Price no longer equals marginal cost and is no longer the sole mechanism used to allocate goods. It is optimal for long term relationships to emerge between buyers and sellers and for sellers to use their knowledge about buyers to ration goods during periods when demand is high. This rationing cam take the form of refusing to sell to new customers and putting established customers on quotas. The evidence shows that this form of rationing, though foreign to the thinking of most economists, characterizes several industries. The theory provides an important incentive for a firm to exist, namely to facilitate trade amongst its customers. The theory also provides a convincing explanation f or the hostility that new futures markets face from established firms in the industry and shows that several practices, like price differences amongst consumers and swapping product with rivals, can be the result of competition and not market power.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3786.

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Date of creation: Jul 1991
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Publication status: published as "The Theory of Allocation and its Implications for Marketing and Industrial Structure: Why Rationing is Efficient. Journal of Law and Economics Vol. 34, October 1991.
Handle: RePEc:nbr:nberwo:3786

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  1. David L. McNicol, 1975. "The Two Price Systems in the Copper Industry," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 50-73, Spring.
  2. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
  3. Sheshinski, Eytan & Dreze, Jacques H, 1976. "Demand Fluctuations, Capacity Utilization, and Costs," American Economic Review, American Economic Association, vol. 66(5), pages 731-42, December.
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Cited by:
  1. Woodford, Michael, 1996. "Loan commitments and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 573-605, June.
  2. Snir, Avichai & Levy, Daniel, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," MPRA Paper 29565, University Library of Munich, Germany.
  3. David, Laurent & Le Breton, Michel & Merillon, Olivier, 2007. "Public Utility Pricing and Capacity Choice with Stochastic Demand," IDEI Working Papers 489, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Dennis W. Carlton, 1996. "A Critical Assessment of the Role of Imperfect Competition in Macroeconomics," NBER Working Papers 5782, National Bureau of Economic Research, Inc.
  5. Skully, David W., 1999. "The Economics Of Trq Administration," Working Papers 14584, International Agricultural Trade Research Consortium.
  6. Massimo A. De Francesco, 2004. "Pricing and matching under duopoly with imperfect buyer mobility," Department of Economics University of Siena 439, Department of Economics, University of Siena.

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