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An Equilibrium Theory of Rationing

Author

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  • Gilbert, Richard
  • Klemperer, Paul

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.

Suggested Citation

  • Gilbert, Richard & Klemperer, Paul, 1993. "An Equilibrium Theory of Rationing," CEPR Discussion Papers 805, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:805
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Ken Binmore & Paul Klemperer, 2002. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licences," Economic Journal, Royal Economic Society, vol. 112(478), pages 74-96, March.
    2. Jeremy Bulow & Paul Klemperer, 1998. "The Tobacco Deal," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998 Micr), pages 323-394.
    3. Felix Oberholzer-Gee, 2003. "A Market for Time: Fairness and Efficiency in Waiting Lines," CREMA Working Paper Series 2003-04, Center for Research in Economics, Management and the Arts (CREMA).
    4. Klemperer, Paul, 2000. "Why every Economist should Learn some Auction Theory," CEPR Discussion Papers 2572, C.E.P.R. Discussion Papers.
    5. Kwang-Sook Huh, 2008. "Strategic Price Decision Inducing Consumer Rationing: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 24, pages 233-257.
    6. Courty, Pascal, 2011. "Unpriced quality," Economics Letters, Elsevier, vol. 111(1), pages 13-15, April.
    7. Laurent Lamy & Philippe Jehiel, 2016. "On the benefits of set-asides," Post-Print hal-01688237, HAL.
    8. Boone, Jan, 2002. "'Be Nice, Unless it Pays to Fight': A New Theory of Price Determination with Implications for Competition Policy," CEPR Discussion Papers 3342, C.E.P.R. Discussion Papers.
    9. Boone, Jan, 2003. "Optimal Competition: A Benchmark for Competition Policy," CEPR Discussion Papers 3766, C.E.P.R. Discussion Papers.
    10. Steven M. Shugan, 2002. "Editorial: Marketing Science, Models, Monopoly Models, and Why We Need Them," Marketing Science, INFORMS, vol. 21(3), pages 223-228.
    11. repec:oup:jcomle:v:3:y:2007:i:1:p:1-47. is not listed on IDEAS
    12. Peck, James, 1996. "Competition in Transactions Mechanisms: The Emergence of Price Competition," Games and Economic Behavior, Elsevier, vol. 16(1), pages 109-123, September.
    13. Michael J. Dueker & Daniel L. Thornton, 1997. "Do bank loan rates exhibit a countercyclical mark-up?," Working Papers 1997-004, Federal Reserve Bank of St. Louis.
    14. Paul Klemperer, 2007. "Bidding Markets," Journal of Competition Law and Economics, Oxford University Press, vol. 3(1), pages 1-47.
    15. Hyytinen, Ari & Väänänen, Lotta, 2004. "Could Mr. and Mrs. Capital Market Imperfection Please Step Forward? An Empirical Analysis of Adverse Selection and Moral Hazard in Capital Markets," Discussion Papers 887, The Research Institute of the Finnish Economy.
    16. Simon Stevenson & James Young, 2015. "The Role of Undisclosed Reserves in English Open Outcry Auctions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 375-402, June.
    17. Dold, Malte & Khadjavi, Menusch, 2017. "Jumping the queue: An experiment on procedural preferences," Games and Economic Behavior, Elsevier, vol. 102(C), pages 127-137.
    18. Liu, Xuyuan & Lu, Jingfeng, 2017. "Optimal prize-rationing strategy in all-pay contests with incomplete information," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 57-90.
    19. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.
    20. Hao Li, 2001. "A Theory of Conservatism," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 617-636, June.
    21. Greve,T. & Pollitt, M. G., 2012. "Designing electiricty transmission auctions: an introduction to the relevant literature," Cambridge Working Papers in Economics 1245, Faculty of Economics, University of Cambridge.
    22. Michael J. Dueker, 2000. "Are prime rate changes asymmetric?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 33-40.

    More about this item

    Keywords

    Rationing; Sunk Costs;

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - 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

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