The Welfare Losses from Price Matching Policies
Several recent papers argue that price matching policies raise equilibrium prices. We add to this literature by considering potential welfare losses, which have two sources: Harberger triangles from high prices and Posner rectangles from over-entry. We compare markets with price matching and free entry to the traditional concerns of antitrust law, monopoly or cartel markets without entry. Price matching with entry leads to greater welfare losses than both monopoly and cartel in markets with a low ratio of fixed to marginal cost and low demand elasticity. We illustrate these general results using parameters from the wholesale gasoline and air travel markets, and relate our model to price matching on NASDAQ.
|Date of creation:||12 Mar 1998|
|Date of revision:||26 May 1998|
|Note:||38 pages. LaTeX format (.dvi), Six figures are embedded in the text.|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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- 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.
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10-93-2, Pennsylvania State - Department of Economics.
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- 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.
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- 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.
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