Solving the Problem
In many big cities where a large part of the population lives in rental apartments, governments have from time to time passed laws or imposed administrative controls putting upper limits on the rent that landlords can charge. As a first step, we want to apply the theory of P-Competitive Equilibrium to this issue.
We'll have to think a little to apply the P-Competitive theory to this example. Recall that the P-Competitive structure is defined by four characteristics. For an industry to have a P-competitive structure, it must have all four of these characteristics:
We also recall that an industry may work as a P-Competitive industry when it only approximates the P-Competitive structure. What about these assumptions? In most big cities, the first and last should be no problem, at least in ordinary times -- there are lots of renters and there are always new buildings being built. The assumption of "sufficient knowledge" shouldn't be a problem either. There are lots of sources of information about apartments in big cities -- agents, newspaper advertisements, and often newspapers devoted to nothing but apartment rental ads. So if a renter doesn't have the information, it won't be hard to get. So the "sufficient knowledge" assumption should be at least approximately true.
But what about the second assumption, "a homogenous product?" If we just look at a list of those apartment ads, apartments don't look like homogenous products. This is a problem for the P-Competitive approach. But sometimes problems can be solved. Can this problem be solved?
(In terms of the Reasonable Dialog, the diversity of individual apartments undercuts the claim that the P-Competitive approach can be applied to the market for apartments. This sort of problem often arises in applied economics. But perhaps we can interpret the market in such a way that the "homogenous products" assumption isn't violated after all. This interpretation would "undercut the undercutter" and restore credibility to the idea that the P-Competitive approach can be applied -- and then we can continue with the application. In this case thinking in terms of Reasonable Dialog can be very practical indeed.
Solving the Problem
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