Understanding Price Controls and Nonprice Competition with Matching Theory
John William Hatfield, Charles R. Plott, Tomomi Tanaka
American Economic Review · 2012 · Volume 102 · Issue 3
Abstract
We develop a quality competition model to understand how price controls affect market outcomes in buyer-seller markets with discrete goods of varying quality. While competitive equilibria do not necessarily exist in such markets when price controls are imposed, we show that stable outcomes do exist and characterize the set of stable outcomes in the presence of price restrictions. In particular, we show that price controls induce non-price competition: price floors induce the trade of inefficiently high quality goods, while price ceilings induce the trade of inefficiently low quality goods.
Keywords
Bargaining Theory, Matching Theory, Economics of Regulation
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