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

70 Pages Posted: 2 Sep 2015

See all articles by John William Hatfield

John William Hatfield

University of Texas at Austin

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Tomomi Tanaka

The World Bank

Date Written: August 30, 2015

Abstract

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

Suggested Citation

Hatfield, John William and Plott, Charles R. and Tanaka, Tomomi, Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium (August 30, 2015). Available at SSRN: https://ssrn.com/abstract=2654431 or http://dx.doi.org/10.2139/ssrn.2654431

John William Hatfield

University of Texas at Austin ( email )

Austin, TX 78712
United States

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

Tomomi Tanaka

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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