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Price and quality in spatial competition

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  • Brekke, Kurt Richard
  • Siciliani, Luigi
  • Straume, Odd Rune

Abstract

We study the relationship between competition and quality within a spatial competition framework where firms compete in prices and quality. We generalise existing literature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship between competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the number of firms and equilibrium quality. This reversal result is further strenghtened if there are cost substitutabilities between output and quality. Equilibrium quality provision is always less than socially optimal in the presence of income effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7422.

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Date of creation: Aug 2009
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Handle: RePEc:cpr:ceprdp:7422

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Keywords: Income effects; Quality; Spatial competition;

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References

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Citations

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Cited by:
  1. Massimo Filippini & Fabian Heimsch & Giuliano Masiero, 2013. "Antibiotic consumption and the role of dispensing physicians," CEPRA working paper 1302, USI Università della Svizzera italiana.
  2. Rita Santos & Hugh Gravelle & Carol Propper, 2013. "Does quality affect patients’ choice of doctor? Evidence from the UK," Working Papers 088cherp, Centre for Health Economics, University of York.
  3. Hugh Gravelle & Anthony Scott & Peter Sivey & Jongsay Yong, 2013. "Competition, Prices and Quality in the Market for Physician Consultations," Melbourne Institute Working Paper Series wp2013n23, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  4. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2013. "Hospital Mergers: A Spatial Competition Approach," Discussion Paper Series in Economics 8/2013, Department of Economics, Norwegian School of Economics.
  5. Brekke, Kurt Richard & Siciliani, Luigi & Straume, Odd Rune, 2014. "Can competition reduce quality?," CEPR Discussion Papers 9810, C.E.P.R. Discussion Papers.
  6. Gravelle, Hugh S & Propper, Carol & Santos, Rita, 2013. "Does quality affect patients’ choice of doctor? Evidence from the UK," CEPR Discussion Papers 9534, C.E.P.R. Discussion Papers.
  7. Brekke, Kurt Richard & Siciliani, Luigi & Straume, Odd Rune, 2011. "Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms?," CEPR Discussion Papers 8284, C.E.P.R. Discussion Papers.
  8. Halonen-Akatwijuka, Maija & Propper, Carol, 2013. "Competition, Equity and Quality in HealthCare," CEPR Discussion Papers 9325, C.E.P.R. Discussion Papers.
  9. Bacchiega, Emanuele & Randon, Emanuela & Zirulia, Lorenzo, 2012. "Strategic accessibility competition," Research in Economics, Elsevier, vol. 66(2), pages 195-212.
  10. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
  11. Dieter Pennerstorfer, 2014. "Price and Quality Competition in Spatial Markets. The Case of Camping Sites," WIFO Working Papers 466, WIFO.
  12. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2014. "Horizontal Mergers and Product Quality," NIPE Working Papers 07/2014, NIPE - Universidade do Minho.
  13. Laura Di Giorgio & Massimo Filippini & Giuliano Masiero, 2014. "The relationship between costs and quality in nonprofit nursing homes," IdEP Economic Papers 1402, USI Università della Svizzera italiana.

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