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Price equilibrium with selling constraints

Author

Listed:
  • Makoto WATANABE
  • José L. Moraga-González
Abstract
This paper studies how selling constraints, which refer to the inability of firms to attend to all the buyers who want to inspect their products, affect the equilibrium price and social welfare. We show that the price that maximizes social welfare is greater than the marginal cost. This is because with selling constraints, a higher price, despite reducing the probability of trade (fewer buyers are willing to pay a higher price) increases the value of trade (only trades generating positive surplus are consummated). We show that the equilibrium price is inefficiently high except in the limit when firms selling constraints vanish and consumers observe prices before they visit firms. Thus, selling constraints constitute a source of market power. Keywords : price competition, market power, capacity- and selling-constrained firms JEL Classification Number : D4, J6, L1, L8, R3

Suggested Citation

  • Makoto WATANABE & José L. Moraga-González, 2023. "Price equilibrium with selling constraints," CIGS Working Paper Series 23-012E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:23-012e
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    References listed on IDEAS

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    Cited by:

    1. Teh, Christopher & Wang, Chengsi & Watanabe, Makoto, 2024. "Strategic limitation of market accessibility: Search platform design and welfare," Journal of Economic Theory, Elsevier, vol. 216(C).

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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