Queues, not just mediocrity: Inefficiency in decentralized markets with vertical differentiation
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bester,Helmut, 1986.
"Bargaining,Search costs and equilibrium price distribution,"
Discussion Paper Serie A
49, University of Bonn, Germany.
- Helmut Bester, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 201-214.
- Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
- 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.
- Gale, Douglas, 1987.
"Limit theorems for markets with sequential bargaining,"
Journal of Economic Theory,
Elsevier, vol. 43(1), pages 20-54, October.
- Douglas Gale, 2010. "Limit theorems for markets with sequential bargaining," Levine's Working Paper Archive 621, David K. Levine.
- 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.
- 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.
- Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-17, May.
- Fershtman, Chaim & Fishman, Arthur, 1994.
"The 'perverse' effects of wage and price controls in search markets,"
European Economic Review,
Elsevier, vol. 38(5), pages 1099-1112, May.
- Fershtman, C. & Fishman, A., 1991. "The "Perverse" Effects of Wage and Price Controls in Search Markets," Papers 11-91, Tel Aviv.
- George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
- Carl Shapiro, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 843-862.
- 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.
- Max R. Blouin, 2003. "Equilibrium in a decentralized market with adverse selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 245-262, 09.
- Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
- JÕzsef SÂkovics & Clara PonsatÎ, 1998. "Rubinstein bargaining with two-sided outside options," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 667-672.
- Rachel E. Kranton, 2003. "Competition and the Incentive to Produce High Quality," Economica, London School of Economics and Political Science, vol. 70(279), pages 385-404, 08.
When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:998-1014. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.