Working Paper: NBER ID: w22305
Authors: Casey B. Mulligan; Kevin K. Tsui
Abstract: A hedonic model featuring quality-quantity tradeoffs reveals a number of surprising market behaviors that can result from price regulations that are imposed on competitive markets for products that have adjustable non-price attributes. Quality need not clear a competitive market in the same way that prices do, because quality can reduce the willingness to pay for quantity. Producers can benefit from price ceilings, at the expense of consumers. Price ceilings can result in quality-degradation “death spirals” that would not occur under quality regulation or excise taxation. The features of tastes and technology that lead to such outcomes are summarized with pairwise comparisons of (not necessarily constant) elasticities.
Keywords: price regulation; quality degradation; quantity traded; market behavior; consumer welfare
JEL Codes: K2; L15; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price ceilings (D41) | quality degradation (L15) |
| price ceilings (D41) | quantity traded (F10) |
| quality degradation (L15) | quantity traded (F10) |
| price ceilings (D41) | producers benefit (Q13) |
| price ceilings (D41) | consumers face quality degradation (L15) |