Can Competition Reduce Quality?
14 Pages Posted: 2 Apr 2012
Date Written: March 28, 2012
We study the effect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.
Keywords: Quality and price competition, Motivated providers, Risk-averse providers
JEL Classification: D21, D43, L13, L30
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