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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 (2012) Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium. Social Science Working Paper, 1360. California Institute of Technology , Pasadena, CA. (Unpublished)

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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. Since competitive equilibria need not exist in markets with price controls, we investigated 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 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 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.

Item Type:Report or Paper (Working Paper)
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Additional Information:We are grateful to Marcus Berliant, Clayton Featherstone, 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 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. Any comments or suggestions are welcome and may be emailed to
Group:Social Science Working Papers
Funding AgencyGrant Number
Gordon and Betty Moore FoundationUNSPECIFIED
Caltech Laboratory of Experimental Economics and Political ScienceUNSPECIFIED
Subject Keywords:Matching; Stability; Competitive Equilibrium; Core; Price Controls
Series Name:Social Science Working Paper
Issue or Number:1360
Classification Code:JEL: C78, C92, C71
Record Number:CaltechAUTHORS:20171103-134556743
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:82941
Deposited By: Jacquelyn Bussone
Deposited On:06 Nov 2017 17:30
Last Modified:03 Oct 2019 19:00

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