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When Excessive Consumption Is Rational

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  • Romano, Richard E

Abstract

If average cost is everywhere above market demand, it is usually argued that the nondiscriminating firm will shut down, although the first-best outcome may dictate production. In this setting, it is shown that there is often a Nash equilibrium in consumption that will keep the firm producing. Selfish consumers engage in excessive (beyond demand) consumption to keep the firm in business and to protect their surpluses. This is shown to be true in a simple model with perfect information and also in a more realistic model in which consumers are uncertain about the firm's costs. Copyright 1991 by American Economic Association.

Suggested Citation

  • Romano, Richard E, 1991. "When Excessive Consumption Is Rational," American Economic Review, American Economic Association, vol. 81(3), pages 553-564, June.
  • Handle: RePEc:aea:aecrev:v:81:y:1991:i:3:p:553-64
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    Cited by:

    1. Matthew Ellman & Sjaak Hurkens, 2014. "Optimal Crowdfunding Design," Working Papers 14-21, NET Institute.
    2. Glazer, Amihai & Konrad, Kai A., 1993. "Ameliorating congestion by income redistribution," Regional Science and Urban Economics, Elsevier, vol. 23(5), pages 579-584, November.
    3. Jen Shang & Rachel Croson, 2009. "A Field Experiment in Charitable Contribution: The Impact of Social Information on the Voluntary Provision of Public Goods," Economic Journal, Royal Economic Society, vol. 119(540), pages 1422-1439, October.
    4. Linda Cohen, "undated". "Patented drugs, generic alternatives, and intellectual property regimes in developing countries," American Law & Economics Association Annual Meetings 1066, American Law & Economics Association.
    5. repec:spr:ecogov:v:18:y:2017:i:3:d:10.1007_s10101-017-0190-z is not listed on IDEAS
    6. Romano, Richard & Yildirim, Huseyin, 2001. "Why charities announce donations: a positive perspective," Journal of Public Economics, Elsevier, vol. 81(3), pages 423-447, September.
    7. Gilles Chemla, 1998. "Dynamic Adverse Selection and Debt," FMG Discussion Papers dp288, Financial Markets Group.
    8. Smith, Vincent H. & Kehoe, Michael R. & Cremer, Mary E., 1995. "The private provision of public goods: Altruism and voluntary giving," Journal of Public Economics, Elsevier, vol. 58(1), pages 107-126, September.
    9. Buraschi, Andrea & Cornelli, Francesca, 2002. "Donations," CEPR Discussion Papers 3488, C.E.P.R. Discussion Papers.

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