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Imperfect Competition with Costly Disposal

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  • Severin Lenhard

Abstract

This paper studies the disposal costs’ effect on consumer surplus and firms’ profits. The costlier disposal, the less is disposed of, firms’ competition for market shares increases, thereby benefiting consumers. Yet firms decrease their produc- tion to mitigate costs, affecting consumer surplus negatively. We present a model with ex ante homogeneous firms producing inventories either early at low cost and with little information about demand, or later with more information yet at higher costs. Unsold products are disposed of. In equilibrium, firms may be asymmetric. Disposal goes down with costs but so do inventories. In our set-up, the negative effect on the trade volume dominates decreasing consumer surplus and firms’ profits. We show, however, that low disposal costs substitute infor- mation about demand. Increasing disposal costs improve a firm’s information advantage and may increase its profits.

Suggested Citation

  • Severin Lenhard, 2021. "Imperfect Competition with Costly Disposal," Diskussionsschriften dp2105, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp2105
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    More about this item

    Keywords

    Disposal; Inventory; Uncertain Demand; Market Structure;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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