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Markets for professional services: queues and mediocrity

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Abstract

We analyze a dynamic, decentralized market with endogenous entry, where in each period the active professionals 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 professionals 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 a professional college setting licensing rules will improve welfare (and even Consumer Surplus), relative to the free market, whenever the inefficiency is caused by a large enough excess supply.

Suggested Citation

  • Clara Ponsati & Jozsef Sakovics, 2005. "Markets for professional services: queues and mediocrity," ESE Discussion Papers 133, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:133
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    1. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-345, May.
    2. Morris M. Kleiner, 2000. "Occupational Licensing," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 189-202, Fall.
    3. 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.
    4. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    5. 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.
    6. 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.
    7. Helmut Bester, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 201-214.
    8. 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 1328-1346, December.
    9. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-288, March.
    10. Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-317, May.
    11. 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, September.
    12. 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, August.
    13. Max Blouin, 2001. "Equilibrium in a Decentralized Market with Adverse Selection," Cahiers de recherche CREFE / CREFE Working Papers 128, CREFE, Université du Québec à Montréal, revised Mar 2001.
    14. Carl Shapiro, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 843-862.
    15. Shirley Svorny, 2004. "Licensing Doctors: Do Economists Agree?," Econ Journal Watch, Econ Journal Watch, vol. 1(2), pages 279-305, August.
    16. 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.
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    Cited by:

    1. 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.

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