Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, May 2, 2013

Price Formation in Consumer Markets

Posted by D. Daniel Sokol

Ante Farm, Swedish Institute for Social Research (SOFI), Stockholm University addresses Price Formation in Consumer Markets.

ABSTRACT: This paper argues that a completely non-cooperative approach to pricing is neither necessary nor plausible in consumer markets. It proposes instead a model where firms decide non-cooperatively on production or marketing, while the market price is set by a competitive price leader, i.e. a firm preferring the lowest market price. Predictions include a revenuemaximizing market price and excess supply in markets where production precedes sales, and non-monopolistic pricing if firms are ‘sufficiently dissimilar’ in markets where sales precede production. The model also provides a simple and plausible explanation of why markets do not always clear.

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