Does Restricting Outsiders Always Lower Price and Benefit Insiders?
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Does Restricting Outsiders Always Lower Price and Benefit Insiders? Tat-kei Lai1 · Travis Ng2 Accepted: 23 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Policies that restrict outsiders are common. Some justifications include protecting insiders from high price and leaving more of the concerned products to insiders. Sometimes these policies fail to work because outsiders can get around the restrictions. In a model in which a policy of restricting outsiders is anticipated, we find that if the policy works, it only sometimes lowers the price. When the price does decrease, the product quality decreases too. Not every insider would benefit equally; those insiders who likely suffer are identified. While restricting outsiders may or may not reduce insiders’ consumer surplus, outsiders and the producer are always worse off. They therefore would find ways to get around the restrictions. Evaluating these policies must (a) take into account the possibility that they might not work at all, (b) check their effects beyond just price if they do work. Keywords Product quality · Customer restrictions · Vertical restraints · Foreign restrictions · Discrimination JEL Classification K25 · K29 · L25 · L51 · R38
Introduction Many policies restrict buyers who are considered “outsiders.” Some countries restrict foreigners or foreign entities from buying real estates and other financial
Travis Ng
[email protected] Tat-kei Lai [email protected] 1
´ IESEG School of Management (LEM-CNRS 9221), Paris, France
2
The Chinese University of Hong Kong, Hong Kong, Hong Kong
T.-k. Lai, T. Ng
assets.1 Some establishments (such as schools, dormitories, hospitals, armies, factories, and other kinds of workplaces) restrict outsiders from buying food in their cafeterias.2 These policies usually concern certain scarce resources, such as land and retail space. Policymakers usually justify these policies as: unrestricting outsiders raises prices and crowds out insiders. To ensure that enough is available for insiders and to protect them from high prices, policymakers have no choice but to restrict outsiders.3 The logic goes as follows: if certain resources are scarce, then allowing outsiders to get their hands on the fruits of such resources leaves few for insiders at high prices. This logic has the following sequence: Someone produces ⇒ Outsiders are restricted ⇒ Products are cheaper and more available for insiders. (I) Economists would question whether the results are robust to the sequence. Their very first question is likely the following, “why would that producer fail to anticipate a restriction on who it can sell to?” Therefore, the kinds of policy scenarios we focus on have the following sequence instead: Outsiders are restricted ⇒ Someone produces ⇒ Are the products still cheaper and more available for insiders? (What about other attributes?) (II) Three reasons make sequence (II) more appropriate to model policies that restrict outsiders than sequence (I). First, given that someone must produce
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