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Dennis W. Carlton
NBER Working Paper No. 425 (Also Reprint No. r0319)*
Issued in September 1982
NBER Program(s): EFG
---- Abstract -----
This paper examines a model in which demand is uncertain and production must occur before demand is known for sure. By investing resources in information gathering activity, demand can be forecast. The paper investigates the relationship between the incentive to plan and market structure and conduct. Competition leads to too little planning, while monopoly leads to too high a price relative to the social optimum. A dominant firm with a competitive fringe turns out to be better. than either pure competition or monopoly. One interesting result is that the optimal production strategy of the dominant firm is to produce even when price is below marginal cost. Although such a production policy resembles that associated with "predatory pricing" (a practice which is thought to be socially undesirable), society would be harmed by prohibition of such a policy.
*Published: Carlton, Dennis W. "Planning and Market Structure." The Economics of Information and Uncertainty, edited by John J. McCall, pp. 47-72. Chicago: University of Chicago Press, 1982.
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