Quality and location choices under price regulation
AbstractIn a model of spatial competition, we analyse 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 and find that this (second-best) price causes over-investment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the cost of investing in product quality, or the transportation cost of consumers, is sufficiently high. Comparing with the case of price competition, we also identify a hitherto unnoticed benefit of regulation, namely improved locational efficiency.
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Bibliographic InfoPaper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 24/02.
Length: 22 pages
Date of creation: 15 Dec 2002
Date of revision:
Contact details of provider:
Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Web page: http://www.uib.no/econ/en
More information through EDIRC
Spatial competition; Product quality; Location; Price regulation.;
Other versions of this item:
- Kurt R. Brekke & Robert Nuscheler & Odd Rune Straume, 2006. "Quality and Location Choices under Price Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 207-227, 03.
- Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-28, Social Science Research Center Berlin (WZB).
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
- R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
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