Marginal Cost Pricing When Spot Markets Are Complete

Abstract

The standard formulation of a spot market subject to uncertain excess demand uses a tatonnement process that restricts trade until the market-clearing price is found. Here I present a model in which there is no restriction on trade during the process of the resolution of uncertainty about aggregate excess demand. The idea is to enlarge the commodity space and define goods by the probability that they will sell, in addition to other characteristics. The probability of sale characteristic is the spot market analogue of the contingencies under which delivery will take place in the Arrow-Debreu model. A failure to distinguish goods by the probability of sale characteristic can lead to the rejection of the competitive paradigm even when everyone is a price taker and the allocation is efficient.