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Too much waste, not enough rationing: the failure of stochastic, competitive markets

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  • De Meza, David
  • Reito, Francesco

Abstract

There are good reasons why sellers often post prices before the realization of demand shocks. We study whether equilibrium prices chosen ex ante coincide with the ex-ante prices that maximize expected aggregate surplus. The main result is that even in the competitive limit there is a divergence. Waste is excessive and entry decisions are distorted. The problem is that for competitive firms to sell in low-demand states involves a costly sacrifice of high-state revenue.

Suggested Citation

  • De Meza, David & Reito, Francesco, 2020. "Too much waste, not enough rationing: the failure of stochastic, competitive markets," LSE Research Online Documents on Economics 104084, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104084
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    References listed on IDEAS

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    1. de Meza, David & Reito, Francesco, 2021. "Macro shocks cause equilibrium price dispersion," Economics Letters, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    stochastic demand; rationing; waste; efficiency;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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