IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3786.html
   My bibliography  Save this paper

The Theory of Allocation and Its Implications for Marketing and Industrial Structure

Author

Listed:
  • Dennis W. Carlton

Abstract

This paper identifies a cost of using the price system and from that develops a general theory of allocation. The theory explains why a buyer's stochastic purchasing behavior matters to a seller. This leads to a theory of optimal customer mix much akin to the theory of optimal portfolio composition. It is the job of a firm's marketing department to put together this optimal customer mix. A dynamic pattern of pricing related to Ramsey pricing emerges as the efficient pricing structure. Price no longer equals marginal cost and is no longer the sole mechanism used to allocate goods. It is optimal for long term relationships to emerge between buyers and sellers and for sellers to use their knowledge about buyers to ration goods during periods when demand is high. This rationing cam take the form of refusing to sell to new customers and putting established customers on quotas. The evidence shows that this form of rationing, though foreign to the thinking of most economists, characterizes several industries. The theory provides an important incentive for a firm to exist, namely to facilitate trade amongst its customers. The theory also provides a convincing explanation f or the hostility that new futures markets face from established firms in the industry and shows that several practices, like price differences amongst consumers and swapping product with rivals, can be the result of competition and not market power.

Suggested Citation

  • Dennis W. Carlton, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure," NBER Working Papers 3786, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3786
    Note: IO EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3786.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. David L. McNicol, 1975. "The Two Price Systems in the Copper Industry," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 50-73, Spring.
    2. Sheshinski, Eytan & Dreze, Jacques H, 1976. "Demand Fluctuations, Capacity Utilization, and Costs," American Economic Review, American Economic Association, vol. 66(5), pages 731-742, December.
    3. Oliver E. Williamson (ed.), 1990. "Industrial Organization," Books, Edward Elgar Publishing, number 593, April.
    4. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-658, September.
    5. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
    2. Daniel Levy & Avichai Snir, 2013. "Shrinking Goods," Emory Economics 1303, Department of Economics, Emory University (Atlanta).
    3. Massimo A. De Francesco, 2004. "Pricing and matching under duopoly with imperfect buyer mobility," Department of Economics University of Siena 439, Department of Economics, University of Siena.
    4. Woodford, Michael, 1996. "Loan commitments and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 573-605, June.
    5. de Meza, David & Reito, Francesco, 2016. "Too Much Waste: A Failure of Stochastic, Competitive Markets," MPRA Paper 76125, University Library of Munich, Germany.
    6. Dennis W. Carlton, 1996. "A Critical Assessment of the Role of Imperfect Competition in Macroeconomics," NBER Working Papers 5782, National Bureau of Economic Research, Inc.
    7. David, Laurent & Le Breton, Michel & Merillon, Olivier, 2007. "Regulating the Natural Gas Transportation Industry: Optimal Pricing Policy of a Monopolist with Advance-Purchase and Spot Markets," IDEI Working Papers 488, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Bertin, Amy L & Bresnahan, Timothy F & Raff, Daniel M G, 1996. "Localized Competition and the Aggregation of Plant-Level Increasing Returns: Blast Furnaces, 1929-1935," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 241-266, April.
    9. Skully, David W., 1999. "The Economics Of Trq Administration," Working Papers 14584, International Agricultural Trade Research Consortium.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3786. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.