Discussion paper
DP14718 Price Equilibrium with Selling Constraints
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 efficiency of competitive search equilibrium. Selling constraints matter because buyers have heterogeneous valuations that they only discover upon inspecting the product. As a result, raising the price increases the likelihood of buyers matching, but decreases their expected utility conditional on a match. We show that the equilibrium price is inefficiently high except in the (arguably unrealistic) limit where firms’ selling constraints vanish.
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