Understanding Price Controls and Nonprice Competition with Matching Theory

John William Hatfield, Charles R. Plott and Tomomi Tanaka

American Economic Review, 2012, vol. 102, issue 3, pages 371-75

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.

Date: 2012
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