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Quality and location choices under price regulation

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  • Brekke, Kurt R.
  • Nuscheler, Robert
  • Straume, Odd Rune

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. By comparing the case of price competition, we also identify a hitherto unnoticed benefit of regulation, namely improved locational efficiency. -- In einem räumlichen Wettbewerbsmodell untersuchen wir die Gleichgewichte, die sich bei exogen gegebenem Preis einstellen. In einem erweiterten Hotelling Modell unterstellen wir, dass die Firmen den Standort (Produktdifferenzierung) und die Qualität ihres Produktes wählen. Wir ermitteln den, aus der Sicht eines sozialen Planers, optimalen Preis. Es zeigt sich, dass dieser (zweitbeste) Preis im Vergleich zum effizienten Ergebnis zu einer Überinvestition in Qualität und zu einer unzureichenden Produktdifferenzierung führt, wenn die Qualitätskosten der Firmen oder die Transportkosten der Konsumenten hinreichend groß sind. Ein Vergleich mit dem Marktergebnis bei Preiswettbewerb offenbart einen bisher unbeachteten positiven Effekt der Preisregulierung, den verbesserten Grad der Produktdifferenzierung.

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Bibliographic Info

Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Market Processes and Governance with number FS IV 02-28.

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Date of creation: 2002
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Handle: RePEc:zbw:wzbmpg:fsiv0228

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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. 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.
  4. 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).
  5. 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.
  6. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  7. 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.
  8. 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.
  9. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
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