Working Paper: CEPR ID: DP805
Authors: Richard J. Gilbert; Paul Klemperer
Abstract: Setting a price that results in rationing may be optimal for a seller whose customers must make a specific investment to be able to use his product. Although rationing results in ex post inefficiency, the resulting distribution of ex post surplus compensates consumers for their transaction-specific costs, while allowing the seller to earn higher profits than with market-clearing prices. Committing to a single price, and rationing if there is excess demand, can be more profitable than setting state-contingent prices that always clear the market. Variants of our basic model provide insights into overbooking practices by the airline industry, declining price paths combined with rationing to favour loyal customers, discriminatory pricing arrangements, second-sourcing, and sticky wages.
Keywords: rationing; sunk costs
JEL Codes: D45; L10; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sunk costs (G31) | seller's pricing strategy (L11) |
| seller's pricing strategy (L11) | consumer behavior (D19) |
| sunk costs (G31) | consumer behavior (D19) |
| seller's pricing strategy (L11) | profits (L21) |
| rationing (D45) | profits (L21) |
| rationing (D45) | distribution of surplus (D39) |