Demand Uncertainty and Market Structure

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9409882 Peck This research will explore the impact of demand uncertainity- -uncertainty about the number and types of customers-- on the workings of markets. The study is divided into two parts. The first part will demonstrate that, under suitable conditions, the only firms who survive competition are those who commit to sell at a fixed price. If demand is higher than expected, firms ration some of their customers rather than increase their prices. This "price competition" has been assumed by previous authors; this study attempts to explain it. The second part of the study will show how the nature of demand uncertainty can effect the efficiency of manufacturer-retailer relationships. Specifically, it will compare resale price maintenance, where the retail price is set by the manufacturer, to a perfectly competitive retail market. Conditions will be derived under which resale price maintenance provides higher profits to the manufacturer and higher utility to the customers than a perfectly competitive retail market. Under these conditions, perfect retail competition is "destructive" in the sense of yielding lower economic welfare than resale price maintenance. The project is important because it attempts to explian the organization of retail markets. The results from the study promise to give us a better understanding of pricing "processes" beyond the traditional view of price competition.