Can Competition Reduce Quality?

14 Pages Posted: 2 Apr 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)

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 3 versions of this paper

Date Written: March 28, 2012

Abstract

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

Suggested Citation

Brekke, Kurt Richard and Siciliani, Luigi and Straume, Odd Rune, Can Competition Reduce Quality? (March 28, 2012). NHH Dept. of Economics Discussion Paper No. 9/2012, Available at SSRN: https://ssrn.com/abstract=2033123 or http://dx.doi.org/10.2139/ssrn.2033123

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

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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