Informationally Efficient Prices are not Allocationally Efficient
12 Pages Posted: 8 Apr 2021
Date Written: March 22, 2021
Abstract
We consider a dynamic market with two firms that sell competing common-value products. The firms offer both products to an infinite set of rational consumers. Each consumer observes a conditionally independent and identically distributed private signal about the product qualities. Consumers enter the market sequentially, observe the market history, and, given the current prices, decide which product to buy. We assume that, with a constant frequency, prices are set to be informationally efficient (i.e., adjusted to reflect the accumulated market information) and establish that a higher frequency of price adjustments implies strictly lower expected welfare.
Keywords: Dynamic pricing, dynamic markets, efficient prices, allocational efficiency, information aggregation, social learning, welfare, asymptotic learning
JEL Classification: L15, L20, D21, D60, D82, D83
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