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Can competition reduce quality?

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Abstract

We study the effect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and riskaverse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.

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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2012/NIPE_WP_05_2012.pdf
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Bibliographic Info

Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 05/2012.

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Date of creation: 2012
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Handle: RePEc:nip:nipewp:05/2012

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Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
Fax: +351-253601380
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Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
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Keywords: Quality and price competition; Motivated providers; Risk-averse providers;

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References

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  1. Wambach, Achim, 1999. "Bertrand competition under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 941-951, October.
  2. Jack, William, 2005. "Purchasing health care services from providers with unknown altruism," Journal of Health Economics, Elsevier, vol. 24(1), pages 73-93, January.
  3. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2007. "Competition and Waiting Times in Hospital Markets," NIPE Working Papers 9/2007, NIPE - Universidade do Minho.
  4. Makris, Miltiadis, 2009. "Incentives for motivated agents under an administrative constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 428-440, August.
  5. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2010. "Price and quality in spatial competition," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 471-480, November.
  6. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2011. "Hospital Competition and Quality with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 444-469, 06.
  7. David C. Grabowski, 2004. "A Longitudinal Study of Medicaid Payment, Private-Pay Price and Nursing Home Quality," International Journal of Health Care Finance and Economics, Springer, vol. 4(1), pages 5-26, 03.
  8. Chalkley, Martin & Malcomson, James M., 1998. "Contracting for health services when patient demand does not reflect quality," Journal of Health Economics, Elsevier, vol. 17(1), pages 1-19, January.
  9. Hviid, Morten, 1989. "Risk-Averse Duopolists and Voluntary Information Transmission," Journal of Industrial Economics, Wiley Blackwell, vol. 38(1), pages 49-64, September.
  10. Martin Gaynor, . "What Do We Know About Competition and Quality in Health Care Markets?," GSIA Working Papers 2006-E62, Carnegie Mellon University, Tepper School of Business.
  11. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
  12. Eggleston, Karen, 2005. "Multitasking and mixed systems for provider payment," Journal of Health Economics, Elsevier, vol. 24(1), pages 211-223, January.
  13. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September.
  14. Barreda-Tarrazona, Iván & García-Gallego, Aurora & Georgantzís, Nikolaos & Andaluz-Funcia, Joaquín & Gil-Sanz, Agustín, 2011. "An experiment on spatial competition with endogenous pricing," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 74-83, January.
  15. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
  16. Janssen, Maarten C.W. & Karamychev, Vladimir A., 2009. "Auctions, aftermarket competition, and risk attitudes," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 274-285, March.
  17. Albert Banal-Estañol & Marco Ottaviani, 2006. "Mergers with Product Market Risk," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 577-608, 09.
  18. Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
  19. Propper, Carol & Burgess, Simon & Green, Katherine, 2004. "Does competition between hospitals improve the quality of care?: Hospital death rates and the NHS internal market," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1247-1272, July.
  20. Hodgkin, Dominic & McGuire, Thomas G., 1994. "Payment levels and hospital response to prospective payment," Journal of Health Economics, Elsevier, vol. 13(1), pages 1-29, March.
  21. Burgess, Simon & Gossage, Denise & Propper, Carol, 2003. "Competition and Quality: Evidence from the NHS Internal Market 1991-9," CEPR Discussion Papers 4026, C.E.P.R. Discussion Papers.
  22. Mougeot, Michel & Naegelen, Florence, 2008. "Supply-side risk adjustment and outlier payment policy," Journal of Health Economics, Elsevier, vol. 27(5), pages 1196-1200, September.
  23. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.
  24. Stefan Felder, 2009. "The variance of length of stay and the optimal DRG outlier payments," International Journal of Health Care Finance and Economics, Springer, vol. 9(3), pages 279-289, September.
  25. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
  26. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  27. David Dranove & Mark A. Satterthwaite, 1992. "Monopolistic Competition When Price and Quality are Imperfectly Observable," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 518-534, Winter.
  28. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Market competition and product quality
    by Economic Logician in Economic Logic on 2012-04-18 13:15:00

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