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Regulating Availability with Demand Uncertainty

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  • Roland Strausz

Abstract

I evaluate a new German regulation that requires retail discounters to guarantee the availability of their products in bargain sales. The regulation is meant to prevent loss leaders. Retailers undermine the regulation's rationale by claiming that rationing is due to demand uncertainty. This paper shows that under demand uncertainty the regulation has ambiguous welfare effects. Effectively, it raises production, which, under imperfect competition, tends to be beneficial. However, the regulation overshoots and decreases welfare if it requires availability for a state of high demand that is relatively unlikely. In this case more sophisticated regulation is required. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2007.

Suggested Citation

  • Roland Strausz, 2007. "Regulating Availability with Demand Uncertainty," German Economic Review, Verein für Socialpolitik, vol. 8, pages 107-121, February.
    • Handle: RePEc:bla:germec:v:8:y:2007:i::p:107-121
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    References listed on IDEAS

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    1. E. Zabel, 1970. "Monopoly and Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(2), pages 205-219.
    2. SMITH, Kenneth R., 1969. "The effect of uncertainty on monopoly price, capital stock and utilization of capital," LIDAM Reprints CORE 32, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 885-913.
    4. Smith, Kenneth R., 1969. "The effect of uncertainty on monopoly price, capital stock and utilization of capital," Journal of Economic Theory, Elsevier, vol. 1(1), pages 48-59, June.
    5. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter.
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    Cited by:

    1. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.

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