Market Behavior Under Partial Price Controls

The use of firm-specific controls on the price of gasoline during 1979 and 1980, at both the wholesale and the retail level, dramatically affected the retail market for gasoline. Price could no longer play its usual role in clearing the retail market for gasoline. This report examines the behavior of an otherwise competitive market in the presence of such regulation-induced nonprice phenomena. It also examines the equilibrium levels of price and nonprice components that emerge from such modal choices by all consumers in a market. Section II briefly reviews the relevant price controls in effect in 1979 and 1980. Section III presents a simple model of partial price control whose implications are developed in Sec. IV. Section V examines how such price controls affect economic efficiency. Section VI illustrates how the analysis can be brought to bear on a specific, concrete, policy proposal, the idea of "gourmet gasoline stations." Several appendixes develop the formal mathematical results that underlie arguments developed in the text.