Selection Effects in Regulated Markets

Abstract

This paper analyzes dynamic selection effects that arise in a regulated market where price structures are determined by a regulator or central management. Consumers come in different types where each type requires a different service or treatment. We show that for a large class of price structures some group of customers is refused the service. Equilibria with selection are welfare inferior to equilibria without selection. We also characterize the class of price structures for which selection does not arise. As the number of customers increases or agents become more patient the class of selection-free price structures shrinks and in the limit it is unique. Moreover, all other price structures induce selection. The general model can be applied to a variety of markets, including health care and taxi markets.