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Quality and Location Choices under Price Regulation

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  • Kurt R. Brekke
  • Robert Nuscheler
  • Odd Rune Straume

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." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 15 (2006)
Issue (Month): 1 (03)
Pages: 207-227

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Handle: RePEc:bla:jemstr:v:15:y:2006:i:1:p:207-227

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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  1. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  2. Hugh Gravelle & Giuliano Masiero, . "Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice," Discussion Papers 00/18, Department of Economics, University of York.
  3. Nuscheler, Robert, 2002. "Physician reimbursement, time-consistency and the quality of care," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-16, Social Science Research Center Berlin (WZB).
  4. Anderson, Simon P & Engers, Maxim, 1994. "Spatial Competition with Price-Taking Firms," Economica, London School of Economics and Political Science, vol. 61(242), pages 125-36, May.
  5. Ching-to Albert Ma & James F. Burgess Jr., 1992. "Quality Competition, Welfare, and Regulation," Papers 0024, Boston University - Industry Studies Programme.
  6. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP -385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Jeroen Hinloopen, 2002. "Price regulation in a spatial duopoly with possible non-buyers," The Annals of Regional Science, Springer, vol. 36(1), pages 19-39.
  8. Asher Wolinsky, 1994. "Regulation of Duopoly: Managed Competition vs. Regulated Monopolies," Discussion Papers 1116, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
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