This paper is concerned with situations where firms not only recognize the dependence of quality on price (of productivity on wages, of default probability on the interest rate charged), but also attempt to use what control they have over price (wages, interest rates) to increase their profits. The recognition of this possibility has important implications for economic theory, which have recently been explored in a large number of papers in several disparate fields. The objective of this paper is to survey these papers and to draw out the central themes of this literature. This paper is divided into four parts, In Part I, we discuss the most important implications of the dependence of quality on price for competitive equilibrium theory--the repeal of the law of supply and demand (Part I.1), the repeal of the law of the single price (Part I.2), the existence of discriminatory equilibria (Part I.3), the comparative static consequences (Part I.4), and the inefficiency of market equilibria (Part I.5). Part II discusses alternative explanations for the dependence of quality on price in labor, capital, and product markets.

This paper uses a variant of the standard search model to examine market equilibrium and the consequences of an increase in the number of firms. If marginal search costs increase with the number of searches, then the demand curve facing any firm will be kinked, with the elasticity of demand with respect to price decreases being less than with respect to price increases; prices may not change in response to changes in marginal costs. As the number of firms increases, the maximum price that is consistent with equilibrium increases to the monopoly price, but the minimum price decreases. On the other hand, if marginal search costs decrease with the number of searches, equilibrium, if it exists, is characterized by a price distribution.

This paper undertakes three sets of tasks: (i) it analyzes positive and normative aspects of price scissors (the domestic terms of trade between agriculture and industry) within nonsocialist as well as socialist LDCs. The critical role of the economy's institutional features (e.g., external trade environment, wage and income determination, and wage-productivity effects) is emphasized. Certain aspects of the Soviet Industrialization Debate and subsequent collectivization are interpreted, (ii) It develops simple rules to delineate who gains and who loses (within agriculture) from changes in terms of trade, (iii) It presents powerful (and informationally parsimonious) rules for Pareto-improving price reforms for cash crops and agricultural inputs.

Stiglitz and Weiss reply regarding credit rationing in markets with imperfect information.