Competition and Quality in Regulated Markets with Sluggish Demand

44 Pages Posted: 1 Feb 2010

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Roberto Cellini

University of Catania - Department of Economics and Business

Luigi Siciliani

University of York

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2010

Abstract

We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities), using a Hotelling framework, in the presence of sluggish demand. We take a differential-game approach, and derive the open-loop solution (providers choose the optimal quality investment plan based on demand at the initial period) and the feedback closed-loop solution (providers observe demand in each period and choose quality in response to current demand). If production costs are strictly convex, the steady state quality is higher under the open-loop solution than under the feedback solution. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state. While fiercer competition (lower transportation costs or less sluggish demand) leads to higher quality in both solutions, the quality response to increased competition is weaker when players use feedback strategies.

Keywords: regulated markets, competition, quality, differential games

JEL Classification: H42, I18, I21, L13, L51

Suggested Citation

Brekke, Kurt Richard and Cellini, Roberto and Siciliani, Luigi and Straume, Odd Rune, Competition and Quality in Regulated Markets with Sluggish Demand (January 2010). CESifo Working Paper Series No. 2922, Available at SSRN: https://ssrn.com/abstract=1545712

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Roberto Cellini

University of Catania - Department of Economics and Business ( email )

Corso Italia 55
95129 Catania, 95129
Italy
+390957537728 (Phone)
+390957537710 (Fax)

Luigi Siciliani (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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