Competition in Regulated Markets with Sluggish Beliefs About Quality

Posted: 19 Jan 2012

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)

Date Written: Spring 2012

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 beliefs about quality. 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 variable costs are strictly convex, and the degree of cost complementarity between quality and output is not too strong, 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 lower transportation costs or less sluggish beliefs lead to higher quality in both solutions, the quality response is weaker when players use feedback strategies.

Suggested Citation

Brekke, Kurt Richard and Cellini, Roberto and Siciliani, Luigi and Straume, Odd Rune, Competition in Regulated Markets with Sluggish Beliefs About Quality (Spring 2012). Journal of Economics & Management Strategy, Vol. 21, Issue 1, pp. 131-178, 2012, Available at SSRN: https://ssrn.com/abstract=1987961 or http://dx.doi.org/10.1111/j.1530-9134.2011.00319.x

Kurt Richard Brekke (Contact Author)

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

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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