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American Economic Review Vol. 102 No. 3 2012

Understanding Price Controls and Nonprice Competition with Matching Theory

John William Hatfield1; Charles R. Plott2; Tomomi Tanaka3

1 Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305. · 2 Division of the Humanities and Social Sciences, California Institute of Technology, 1200 East California Boulevard, Pasadena, CA 91125. · 3 School of Politics and Global Studies, Arizona State University, P.O. Box 873902, Tempe, AZ 85287.

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.

DOI
10.1257/aer.102.3.371
Volume
102
Issue
3
Pages
371-375
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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