Antitrust & Competition Policy Blog

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

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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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