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

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  • Kurt R. Brekke
  • Roberto Cellini
  • Luigi Siciliani
  • Odd Rune Straume

Abstract

We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a di¤erential 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 feedback 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, and the results are similar to the ones obtained by static models. 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 e¤ectively 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 Department of Economics, University of York in its series Discussion Papers with number 08/05.

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Date of creation: Apr 2008
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Handle: RePEc:yor:yorken:08/05

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Keywords: Regulated markets; Competition; Quality;

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Citations

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Cited by:
  1. Alexandre, Fernando & Portela, Miguel & Sá, Carla, 2008. "Admission Conditions and Graduates' Employability," IZA Discussion Papers 3530, Institute for the Study of Labor (IZA).
  2. 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.
  3. Hugh Gravelle & Rita Santos & Luigi Siciliani & Rosalind Goudie, 2012. "Hospital Quality Competition Under Fixed Prices," Working Papers, Centre for Health Economics, University of York 080cherp, Centre for Health Economics, University of York.
  4. Paulo Bastos & Natália P. Monteiro, 2011. "Managers and Wage Policies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 957-984, December.

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