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Quality and location choices under price regulation

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Author Info

  • Brekke, Kurt R.

    () (Department of Economics, Programme for Health Economics in Bergen (HEB))

  • Nuscheler, Robert

    () (Wissenschaftszentrum Berlin für Sozialforschung (WZB).)

  • Straume, Odd Rune

    () (Institute for Research in Economics and Business Administration)

Abstract

In 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 Info

Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 24/02.

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Length: 22 pages
Date of creation: 15 Dec 2002
Date of revision:
Handle: RePEc:hhs:bergec:2002_024

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Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Phone: (+47)55589200
Fax: (+47)55589210
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Web page: http://www.uib.no/econ/en
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Keywords: Spatial competition; Product quality; Location; Price regulation.;

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References

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  1. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
  2. 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.
  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. 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.
  5. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  6. Gravelle, Hugh & Masiero, Giuliano, 2000. "Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice," Journal of Health Economics, Elsevier, vol. 19(6), pages 1067-1088, November.
  7. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
  9. 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.
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