Too much waste, not enough rationing: the failure of stochastic, competitive markets
De Meza, D.
& Reito, F.
(2020).
Too much waste, not enough rationing: the failure of stochastic, competitive markets.
Journal of Economic Theory,
188,
https://doi.org/10.1016/j.jet.2020.105067
& Reito, F.
(2020).
Too much waste, not enough rationing: the failure of stochastic, competitive markets.
Journal of Economic Theory,
188,
https://doi.org/10.1016/j.jet.2020.105067
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.