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Understanding Price Controls and Nonprice Competition with Matching Theory

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

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.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.371
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 3 (May)
Pages: 371-75

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:371-75
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  1. Klaus Bettina & Walzl Markus, 2006. "Stable Many-to-Many Matchings with Contracts," Research Memorandum 042, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Hashimoto, Masanori, 1982. "Minimum Wage Effects on Training on the Job," American Economic Review, American Economic Association, vol. 72(5), pages 1070-87, December.
  3. Michael Ostrovsky, 2008. "Stability in Supply Chain Networks," American Economic Review, American Economic Association, vol. 98(3), pages 897-923, June.
  4. 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.
  5. 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.
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