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Planning and Market Structure

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  • Dennis W. Carlton

Abstract

This paper examines a model in which demand is uncertain and production must occur before demand is known for sure. By investing resources in information gathering activity, demand can be forecast. The paper investigates the relationship between the incentive to plan and market structure and conduct. Competition leads to too little planning, while monopoly leads to too high a price relative to the social optimum. A dominant firm with a competitive fringe turns out to be better. than either pure competition or monopoly. One interesting result is that the optimal production strategy of the dominant firm is to produce even when price is below marginal cost. Although such a production policy resembles that associated with "predatory pricing" (a practice which is thought to be socially undesirable), society would be harmed by prohibition of such a policy.

Suggested Citation

  • Dennis W. Carlton, 1980. "Planning and Market Structure," NBER Working Papers 0425, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0425
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    References listed on IDEAS

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    1. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
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    Cited by:

    1. Michael Spence, 2002. "Signaling in Retrospect and the Informational Structure of Markets," American Economic Review, American Economic Association, vol. 92(3), pages 434-459, June.
    2. Edward P. Lazear, 1983. "Raids and Imitation," NBER Working Papers 1158, National Bureau of Economic Research, Inc.

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