NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Planning and Market Structure

Dennis W. Carlton

NBER Working Paper No. 425 (Also Reprint No. r0319)
Issued in 1980
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w0425

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