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Efficiency and marginal cost pricing in dynamic competitive markets with friction

Author

Listed:
  • Cho, In-Koo

    () (Department of Economics, University of Illinois)

  • Meyn, Sean P.

    () (Department of Electrical and Computer Engineering, University of Illinois)

Abstract

This paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost. If friction is present, no matter how small, then the market price fluctuates between zero and the "choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The distribution of the gains from trading in an efficient allocation may be skewed in favor of the supplier, although every player in the market is a price taker.

Suggested Citation

  • Cho, In-Koo & Meyn, Sean P., 2010. "Efficiency and marginal cost pricing in dynamic competitive markets with friction," Theoretical Economics, Econometric Society, vol. 5(2), May.
  • Handle: RePEc:the:publsh:324
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    File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20100215/3777/149
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    Cited by:

    1. Tsitsiklis, John N. & Xu, Yunjian, 2015. "Pricing of fluctuations in electricity markets," European Journal of Operational Research, Elsevier, vol. 246(1), pages 199-208.

    More about this item

    Keywords

    Dynamic general equilibrium model with supply friction; choke-up price; marginal production cost; welfare theorems;

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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