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Regulation of Duopoly: Managed Competition vs Regulated Monopolies

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  • Asher Wolinsky

Abstract

This paper discusses the regulation of oligopolistic differentiated-product industries. The regulator can control prices and impose quantity restrictions, but cannot control the quality choices of the firms. We inquire about the optimal choice of regulatory regime-whether and under what conditions managed competition or segmentation of the market between regulated monopolies achieves better results. In the spatial duopoly model analyzed here, unhindered competition generally results in an inefficient allocation. When the regulator knows the technologies, optimal managed competition results in distortions of the quality choice, but an optimal regulated-monopolies regime achieves the first best outcome. When the regulator is uncertain about the technologies, neither of these methods yields the first-best outcome. The regulated-monopolies regime still tends to produce better quality choices, but managed competition tends to be more effective at extracting rents from the firms. The overall comparison depends on some finer details of the environment. Copyright (c) 1997 Massachusetts Institute of Technology.

Suggested Citation

  • Asher Wolinsky, 1997. "Regulation of Duopoly: Managed Competition vs Regulated Monopolies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 821-847, December.
  • Handle: RePEc:bla:jemstr:v:6:y:1997:i:4:p:821-847
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    References listed on IDEAS

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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. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-533, Fall.
    3. James J. Anton & Paul J. Gertler, 2004. "Regulation, Local Monopolies and Spatial Competition," Journal of Regulatory Economics, Springer, vol. 25(2), pages 115-141, March.
    4. James J. Anton & Dennis A. Yao, 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 538-552, Winter.
    5. Morton I. Kamien & Daniel R. Vincent, 1991. "Price Regulation and Quality of Service," Discussion Papers 920, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    Cited by:

    1. 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.
    2. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2007. "Gatekeeping in health care," Journal of Health Economics, Elsevier, vol. 26(1), pages 149-170, January.
    3. Nadja Kairies-Schwarz, 2014. "Altruism Heterogeneity and Quality Competition Among Healthcare Providers," Ruhr Economic Papers 0507, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    5. Yongmin Chen & Ruqu Wang, 2006. "Market Design with Correlated Valuations," Economica, London School of Economics and Political Science, vol. 73(292), pages 659-672, November.
    6. Brekke, Kurt Richard & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and quality in regulated markets with sluggish demand," CEPR Discussion Papers 6938, C.E.P.R. Discussion Papers.
    7. 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, June.
    8. Kurt R. Brekke & Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2008. "Competition and quality in regulated markets: a differential-game approach," Discussion Papers 08/05, Department of Economics, University of York.
    9. Kumkar, Lars, 1998. "Regulierung vertikal strukturierter Industrien: Eine Analyse der Stromwirtschaftschaft auf Grundlage der neuen Institutionenökonomik," Kiel Working Papers 874, Kiel Institute for the World Economy (IfW).
    10. Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2010. "Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter," TSE Working Papers 10-164, Toulouse School of Economics (TSE).
    11. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
    12. Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2012. "The regulation of health care providers’ payments when horizontal and vertical differentiation matter," Journal of Health Economics, Elsevier, vol. 31(5), pages 691-704.
    13. Auriol, Emmanuelle, 1998. "Deregulation and quality," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 169-194, March.
    14. Kurt R. Brekke & Robert Nuscheler & Odd Rune Straume, 2006. "Quality and Location Choices under Price Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 207-227, March.
    15. repec:eee:jhecon:v:57:y:2018:i:c:p:131-146 is not listed on IDEAS
    16. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2011. "Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms?," Discussion Paper Series in Economics 2/2011, Norwegian School of Economics, Department of Economics.
    17. repec:zbw:rwirep:0507 is not listed on IDEAS
    18. Pedro Pita Barros & Xavier Martinez-Giralt, 2002. "Public and Private Provision of Health Care," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(1), pages 109-133, March.
    19. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
    20. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    21. Beitia, Arantza, 2003. "Hospital quality choice and market structure in a regulated duopoly," Journal of Health Economics, Elsevier, vol. 22(6), pages 1011-1036, November.
    22. Kairies-Schwarz, Nadja, 2014. "Altruism Heterogeneity and Quality Competition Among Healthcare Providers," Ruhr Economic Papers 507, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    23. Brekke, Kurt R. & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2010. "Competition and quality in health care markets: A differential-game approach," Journal of Health Economics, Elsevier, vol. 29(4), pages 508-523, July.
    24. Polsky, Daniel & David, Guy & Yang, Jianing & Kinosian, Bruce & Werner, Rachel M., 2014. "The effect of entry regulation in the health care sector: The case of home health," Journal of Public Economics, Elsevier, vol. 110(C), pages 1-14.

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