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Queues, not just mediocrity: Inefficiency in decentralized markets with vertical differentiation

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  • Ponsatí­, Clara
  • Sákovics, József

Abstract

We analyze a dynamic, decentralized market with endogenous entry, where in each period the active sellers supply one unit of an indivisible service at varying degrees of quality. The customers that have entered the market are randomly matched with the active sellers and prices are set by (complete information) pair-wise bargaining. In its unique steady state, the market leads to an excess diversity of quality and customers may have to suffer costly delays. Notably, efficiency is not regained as per period delay costs disappear. We also show that setting minimal quality standards, such as licensing rules by a professional college, will improve welfare (and even Consumer Surplus), relative to the free market, whenever the inefficiency is caused by a large enough excess supply.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 4 (July)
Pages: 998-1014

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Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:998-1014

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Web page: http://www.elsevier.com/locate/inca/505551

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  1. Steven J. Davis, 2001. "The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium," NBER Working Papers 8434, National Bureau of Economic Research, Inc.
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  4. Shapiro, Carl, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 843-62, October.
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  8. Anwar Ahmed W & Sákovics József, 2007. "A Decentralized Market for a Perishable Good," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-25, February.
  9. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-88, March.
  10. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-17, May.
  11. Bester,Helmut, 1986. "Bargaining,Search costs and equilibrium price distribution," Discussion Paper Serie A 49, University of Bonn, Germany.
  12. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  13. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
  14. Max R. Blouin, 2003. "Equilibrium in a decentralized market with adverse selection," Economic Theory, Springer, vol. 22(2), pages 245-262, 09.
  15. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-46, December.
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