Quality and Location Choices Under Price Regulation

21 Pages Posted: 16 Apr 2006

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)

Robert Nuscheler

Wissenschaftszentrum Berlin fuer Sozialforschung (WZB) - Market Processes and Governance

Odd Rune Straume

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

Abstract

In a model of spatial competition, we analyze the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator. If the regulator can commit to a price prior to the choice of locations, the optimal (second-best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first-best quality, but horizontal differentiation is inefficiently high.

Suggested Citation

Brekke, Kurt Richard and Nuscheler, Robert and Straume, Odd Rune, Quality and Location Choices Under Price Regulation. Journal of Economics & Management Strategy, Vol. 15, No. 1, pp. 207-227, March 2006, Available at SSRN: https://ssrn.com/abstract=874126 or http://dx.doi.org/10.1111/j.1530-9134.2006.00098.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

Robert Nuscheler

Wissenschaftszentrum Berlin fuer Sozialforschung (WZB) - Market Processes and Governance ( email )

Reichpietschufer 50
D-10785 Berlin
Germany

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
15
Abstract Views
565
PlumX Metrics