Efficiency and marginal cost pricing in dynamic competitive markets with friction

In Koo Cho, Sean P. Meyn

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost. If friction is present, no matter how small, then the market price fluctuates between zero and the " choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The distribution of the gains from trading in an efficient allocation may be skewed in favor of the supplier, although every player in the market is a price taker.

Original languageEnglish (US)
Pages (from-to)215-239
Number of pages25
JournalTheoretical Economics
Volume5
Issue number2
DOIs
StatePublished - May 2010

Keywords

  • Choke-up price
  • Dynamic general equilibrium model with supply friction
  • Marginal production cost
  • Welfare theorems

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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