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Competition and quality in regulated markets: a differential-game approach

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Abstract

We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a differential game approach, in which quality is a stock variable. Using a Hotelling framework, we derive the open-loop solution (providers commit to an optimal investment plan at the initial period) and the closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal provision cost is constant, the open-loop and closed-loop solutions coincide, implying that static models are robust to a dynamic specification. If the marginal provision cost is increasing, investment and quality are lower in the closed-loop solution: in fact, quality drops to the minimum level in steady state, implying that quality competition is effectively eliminated. In this case, static models tend to exaggerate the positive effect of competition on quality. Our results can explain the mixed empirical evidence on competition and quality for regulated markets.

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Bibliographic Info

Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 08/2008.

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Date of creation: 2008
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Handle: RePEc:nip:nipewp:08/2008

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Keywords: Regulated markets; Competition; Quality.;

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Citations

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Cited by:
  1. Kurt R. Brekke & Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2010. "Competition and Quality in Regulated Markets with Sluggish Demand," CESifo Working Paper Series 2922, CESifo Group Munich.
  2. Natália P. Monteiro & Paulo Bastos, 2009. "Managers and wage policies," NIPE Working Papers 2/2009, NIPE - Universidade do Minho.
  3. Hugh Gravelle & Rita Santos & Luigi Siciliani & Rosalind Goudie, 2012. "Hospital Quality Competition Under Fixed Prices," Working Papers 080cherp, Centre for Health Economics, University of York.
  4. Alexandre, Fernando & Portela, Miguel & Sá, Carla, 2008. "Admission Conditions and Graduates' Employability," IZA Discussion Papers 3530, Institute for the Study of Labor (IZA).

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