Economic Theory and Experimental Seminar - Ellen Muir (Stanford University)

Title:   Monopoly pricing, optimal rationing and resale (joint with Simon Loertscher)

Abstract:  Non-market clearing prices that induce rationing and open scope for resale--that sellers actively attempt to prevent--are a persistent feature of reality but have proved puzzling for theory. Why, one wonders, would the seller not set market clearing prices in the first place, thereby increasing revenue and preempting resale? We first show that the phenomenon of non-market clearing pricing together with the prevention of resale is consistent with optimal behaviour by a monopoly seller. In particular, we show that selling a given quantity with non-market clearing prices is optimal if and only if the revenue function is not globally concave and that the seller is always harmed by resale. Moreover, we provide conditions such that consumers are also harmed by resale, and we derive the optimal pricing and level of production for the seller when resale in the presence of non-market clearing prices cannot be avoided. Using these insights, we then generalize the analysis to accommodate quantity competition between firms without requiring that prices are market clearing.