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Competition and quality in regulated markets with sluggish demand

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Author Info
Brekke, Kurt Richard
Cellini, Roberto
Siciliani, Luigi
Straume, Odd Rune

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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 demand. We take a differential game approach, and derive the open-loop solution (providers commit to an optimal investment plan at the initial period) and the feedback closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal cost of provision is increasing, the steady state quality is higher under the open- loop solution than under the closed-loop solution. Fiercer competition (lower transportation costs and/or less sluggish demand) leads to higher quality in both solutions, but the quality response to increased competition is weaker when players use closed-loop strategies. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6938.

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Date of creation: Aug 2008
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Handle: RePEc:cpr:ceprdp:6938

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Related research
Keywords: competition; quality; Regulated markets;

Find related papers by JEL classification:
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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    Other versions:
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  18. Asher Wolinsky, 1997. "Regulation of Duopoly: Managed Competition vs Regulated Monopolies," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(4), pages 821-847, December. [Downloadable!] (restricted)
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