Open AccessEfficiency and marginal cost pricing in dynamic competitive markets with friction
Author(s) -
Cho InKoo,
Meyn Sean P.
Publication year - 2010
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te324
Subject(s) - economics , marginal cost , microeconomics , choke , marginal revenue , volatility (finance) , marginal product , limit price , production (economics) , econometrics , price level , monetary economics , physics , quantum mechanics
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.