Efficiency and marginal cost pricing in dynamic competitive markets with friction

In Koo Cho, Sean Meyn

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

This paper examines market models with supply friction. We examine a competitive equilibrium model, and a monopolistic model in which a single firm determines the market price. The following conclusions are obtained: (i) If friction is present, no matter how small, then the market prices fluctuate between zero and the "choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. This conclusion holds for both the competitive equilibrium market model, and the monopolistic market model. (ii) The long-run average price in the competitive model is always greater than the marginal cost, but less than the long-run average cost in the monopolistic model. (iii) In the competitive model the consumer obtains social surplus, while in the monopolistic model the supplier extracts the entire surplus from the market.

Original languageEnglish (US)
Title of host publicationProceedings of the 46th IEEE Conference on Decision and Control 2007, CDC
Pages771-778
Number of pages8
DOIs
StatePublished - 2007
Event46th IEEE Conference on Decision and Control 2007, CDC - New Orleans, LA, United States
Duration: Dec 12 2007Dec 14 2007

Publication series

NameProceedings of the IEEE Conference on Decision and Control
ISSN (Print)0191-2216

Other

Other46th IEEE Conference on Decision and Control 2007, CDC
CountryUnited States
CityNew Orleans, LA
Period12/12/0712/14/07

Keywords

  • Dynamic economic equilibrium models
  • Dynamic newsboy models
  • First welfare theorem
  • Monopolistic economic markets
  • Supply friction

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Modeling and Simulation
  • Control and Optimization

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