Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium
70 Pages Posted: 2 Sep 2015
Date Written: August 30, 2015
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 (the solution concept of classical market theory) 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.
Keywords: price controls, non-price competition, quality, non-existence, matching, assignment
JEL Classification: C68, C78, D45, D46, D52
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