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The Welfare Losses from Price-Matching Policies

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  • Edlin, Aaron S
  • Emch, Eric R

Abstract

Several recent papers argue that price-matching policies raise equilibrium prices. The authors add to this literature by considering potential welfare losses, which have two sources: Harberger triangles from high prices and Posner rectangles from overentry. They compare price-matching markets with entry to monopoly and price-matching markets without entry, and find that price matching with entry creates greater welfare losses than monopoly in markets with a low ratio of fixed to marginal cost. The authors illustrate this result using parameters from the U.S. wholesale gasoline and air travel markets and relate their model to price matching among NASDAQ marketmakers. Copyright 1999 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

Volume (Year): 47 (1999)
Issue (Month): 2 (June)
Pages: 145-67

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Handle: RePEc:bla:jindec:v:47:y:1999:i:2:p:145-67

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References

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  1. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
  2. Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
  3. Doyle, Christopher, 1988. "Different selling strategies in Bertrand oligopoly," Economics Letters, Elsevier, vol. 28(4), pages 387-390.
  4. Christie William G. & Huang Roger D., 1994. "Market Structures and Liquidity: A Transactions Data Study of Exchange Listings," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 300-326, June.
  5. Corts, Kenneth S., 1995. "On the robustness of the argument that price-matching is anti-competitive," Economics Letters, Elsevier, vol. 47(3-4), pages 417-421, March.
  6. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  7. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. " Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-60, December.
  8. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
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Citations

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Cited by:
  1. F. Javier Casado-Izaga, 2000. "Welfare effects of price-matching policies in a differentiated product market," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 487-498, May.
  2. Sridhar Moorthy & Ralph Winter, 2002. "Price-Matching Guarantees," Review of Marketing Science Working Papers 2-1-1020, Berkeley Electronic Press.
  3. Louis Kaplow & Carl Shapiro, 2007. "Antitrust," NBER Working Papers 12867, National Bureau of Economic Research, Inc.
  4. Enrique Fatas & Juan Mañez, 2007. "Are low-price promises collusion guarantees? An experimental test of price matching policies," Spanish Economic Review, Springer, vol. 9(1), pages 59-77, March.
  5. Datta, Shakun & Offenberg, Jennifer, 2003. "An Experimental Examination of Competitor-Based Price Matching Guarantees," MPRA Paper 575, University Library of Munich, Germany, revised 22 Oct 2006.
  6. Raskovich, Alexander, 2007. "Retail buyer power through steering," Economics Letters, Elsevier, vol. 96(2), pages 221-225, August.
  7. Subhasish Dugar & Todd Sorensen, 2006. "Hassle Costs, Price-Matching Guarantees and Price Competition: An Experiment," Review of Industrial Organization, Springer, vol. 28(4), pages 359-378, June.
  8. Schwalbe, Ulrich & Baake, Pio, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80023, Verein für Socialpolitik / German Economic Association.
  9. Pio Baake & Ulrich Schwalbe, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Discussion Papers of DIW Berlin 1335, DIW Berlin, German Institute for Economic Research.
  10. Oliver Budzinski, 2009. "Modern Industrial Economics and Competition Policy: Open Problems and Possible Limits," Working Papers 93/09, University of Southern Denmark, Department of Environmental and Business Economics.

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