Price Fixing Schemes and Optimal Buffer Stock Policies

Abstract

This paper examines the feasibility of price fixing and the welfare implications of government buffer stock programs in a stochastic general equilibrium framework. It is found that regardless of the price set by the government and regardless of the initial level of buffer stocks, a price fixing scheme will eventually fail with probability one. In a competitive equilibrium with storage by individuals, prices will be random even if the nature of the stochastic processes are known to everyone. In the absence of contingent contracts such an equilibrium can be second best.