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Understanding Price Controls and Nonprice Competition with Matching Theory

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  • John William Hatfield
  • Charles R. Plott
  • Tomomi Tanaka

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.

Suggested Citation

  • John William Hatfield & Charles R. Plott & Tomomi Tanaka, 2012. "Understanding Price Controls and Nonprice Competition with Matching Theory," American Economic Review, American Economic Association, vol. 102(3), pages 371-375, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:371-75
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.371
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    References listed on IDEAS

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    1. John William Hatfield & Scott Duke Kominers & Alexandru Nichifor & Michael Ostrovsky & Alexander Westkamp, 2013. "Stability and Competitive Equilibrium in Trading Networks," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 966-1005.
    2. Klaus, Bettina & Walzl, Markus, 2009. "Stable many-to-many matchings with contracts," Journal of Mathematical Economics, Elsevier, vol. 45(7-8), pages 422-434, July.
    3. Kelso, Alexander S, Jr & Crawford, Vincent P, 1982. "Job Matching, Coalition Formation, and Gross Substitutes," Econometrica, Econometric Society, vol. 50(6), pages 1483-1504, November.
    4. Hashimoto, Masanori, 1982. "Minimum Wage Effects on Training on the Job," American Economic Review, American Economic Association, vol. 72(5), pages 1070-1087, December.
    5. Michael Ostrovsky, 2008. "Stability in Supply Chain Networks," American Economic Review, American Economic Association, vol. 98(3), pages 897-923, June.
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    Cited by:

    1. Dürr, Niklas S. & Engelstätter, Benjamin & Ward, Michael R., 2017. "Strategic microscheduling of movies," ZEW Discussion Papers 17-033, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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