Long-term regulatory orientation and the ideal timing of quality investment

This paper builds on a duopoly with horizontally differentiated firms, where firms simultaneously decide the long-term plan (location) in addition to the short-term issue (price). As in Bárcena-Ruiz and Casado-Izaga (2014), we introduce a third entity in the city by considering the presence of a policymaker that targets the long-run ideology (location) of the regulated sector. While Bárcena-Ruiz and Casado-Izaga (2014) relies on a non-discriminatory setting relatively to firms' quality, here we introduce quality distortion (a high-quality firm versus a low-quality firm). Our aim is to study the relationship between the long-term regulatory guidance provided by a policymaker and the ideal timing of the quality investment conducted by the high-quality firm. We find that it is irrelevant to the firm invest before or after the long-term decision of the policymaker. In this sense, we show that the long-term strategic guideline conducted by a regulatory authority is not the motivating source of firms' improvement-quality investments. Finally, we conclude that the presence of an asymmetric quality environment between firms leads to a movement to the right on firms' location, creates an ambiguous (an enhancing) effect on the equilibrium profit of the low-quality (high-quality) firm and generates a reduction of the equilibrium consumer surplus and equilibrium social welfare as well, relatively to a situation where no quality discrimination exists.