Munich Personal RePEc Archive

Too Much Waste: A Failure of Stochastic, Competitive Markets

de Meza, David and Reito, Francesco (2016): Too Much Waste: A Failure of Stochastic, Competitive Markets.

[img]
Preview
PDF
MPRA_paper_76125.pdf

Download (235kB) | Preview

Abstract

The equilibrium of a competitive market in which firms must choose prices ex ante and demand is stochastic is shown to be second-best inefficient. Even under risk neutrality, equilibrium price exceeds the welfare-maximising predetermined price. Competition tends to eliminate rationing, but at the greater welfare cost of creating excess capacity. Entry incentives are also distorted. In low states, entrants obtain a share of revenue without increasing consumption, giving rise to a version of the common pool problem. In high states, firms do not appropriate the consumer surplus gained from marginal reductions in rationing. As a result of these o¤setting externalities, the number of firms may be excessive or insufficient. Inefficiency arises whether or not the rationing rule is efficient.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.