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The Welfare Losses from Price-Matching Policies

  • Edlin, Aaron S
  • Emch, Eric R

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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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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  1. Crocker, K.J. & Lyon, T.P., 1993. "What Do "Facilitating Practices" Facilitates? An Empirical Investigation of Most-Favored Nation Clauses in Natural Gas Contracts," Papers 10-93-2, Pennsylvania State - Department of Economics.
  2. 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.
  3. 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.
  4. Doyle, Christopher, 1988. "Different selling strategies in Bertrand oligopoly," Economics Letters, Elsevier, vol. 28(4), pages 387-390.
  5. 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.
  6. Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
  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. 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.
  9. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
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