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Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium

Hatfield, John William and Plott, Charles R. and Tanaka, Tomomi (2016) Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium. Games and Economic Behavior, 99 . pp. 134-163. ISSN 0899-8256.

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We investigate how price ceilings and floors affect outcomes in continuous time, double auction markets with discrete goods and multiple qualities. When price controls exist, the existence of competitive equilibria is no longer guaranteed; hence, we investigate the nature of non-price competition and how markets might evolve in its presence. We develop a quality competition model based on matching theory. Equilibria of the quality competition model always exist in such price-constrained markets; moreover, they naturally correspond to competitive equilibria when competitive equilibria exist. Additionally, we characterize the set of equilibria of the quality competition model in the presence of price restrictions. In a series of experiments, we find that market outcomes closely conform to the predictions of the model. In particular, price controls induce non-price competition between agents both in theory and in the experimental environment; market behaviors result in allocations close to the predictions of the model.

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Additional Information:© 2016 Elsevier Inc. Received 25 June 2016; Available online 27 July 2016. We are grateful to Marcus Berliant, Clayton Featherstone, Fuhito Kojima, Scott Duke Kominers, Muriel Niederle, Alvin E.Roth, Nilanjan Roy, William Zame and seminar participants at Boston College, the 2009 Lee Center Workshop at Caltech, Harvard Business School, and New York University for helpful discussions. We are also grateful to Matthew Jones who helped us conduct the experiments and to Hsing Yang Lee and Travis Maron for their technical assistance. The financial support of the Gordon and Betty Moore Foundation (grant #1168) and the support of the Caltech Laboratory of Experimental Economics and Political Science are gratefully acknowledged. Hatfield appreciates the hospitality of Harvard Business School, and Tanaka appreciates the hospitality of University of Tokyo, which hosted them during parts of this research. Much of this work was completed while Hatfieldwas at the Graduate School of Business of Stanford University and Tanaka was at the School of Politics and Global Studies at Arizona State University. Any comments or suggestions are welcome and may be emailed to corresponding author.
Funding AgencyGrant Number
Gordon and Betty Moore Foundation1168
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Subject Keywords:Matching; Stability; Competitive equilibrium; Core; Price controls
Classification Code:JEL: C78, C92, C71, D47
Record Number:CaltechAUTHORS:20140403-111558872
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Official Citation:John William Hatfield, Charles R. Plott, Tomomi Tanaka, Price controls, non-price quality competition, and the nonexistence of competitive equilibrium, Games and Economic Behavior, Volume 99, September 2016, Pages 134-163, ISSN 0899-8256, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:44640
Deposited By: Susan Vite
Deposited On:27 Jun 2014 22:18
Last Modified:03 Oct 2019 06:20

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