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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 5, Number 2 (May 2010) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/27186

Title: Efficiency and marginal cost pricing in dynamic competitive markets with friction
Authors: In-Koo Cho; Department of Economics, University of Illinois
Sean P. Meyn; Department of Electrical and Computer Engineering, University of Illinois
Keywords: Dynamic general equilibrium model with supply friction, choke-up price, marginal production cost, welfare theorems
D41, D51
Issue Date: 17-May-2010
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 5, No 2 (2010)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] 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.
URI: http://hdl.handle.net/1807/27186
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20100215
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 5, Number 2 (May 2010)

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