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A dynamic model of quality competition with endogenous prices

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  • Cellini, Roberto
  • Siciliani, Luigi
  • Straume, Odd Rune

Abstract

We develop a dynamic model of price and quality competition in order to analyze the effects of competition on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level. Our model combines a differential-game approach with a Hotelling spatial competition framework, and our analysis applies in particular to industries such as long-term care, health care, child care and education. If providers (nursing homes, hospitals, schools, nurseries) use closed-loop decision rules, which imply strategic interaction over time, we show that, although increased competition leads to higher quality in the steady state, quality provision is nevertheless lower than under open-loop rules, and also suboptimally low from a welfare perspective. Thus, our analysis identifies dynamic strategic interaction between competing providers as a potential source of inefficiency in quality provision.

Suggested Citation

  • Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2018. "A dynamic model of quality competition with endogenous prices," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 190-206.
  • Handle: RePEc:eee:dyncon:v:94:y:2018:i:c:p:190-206
    DOI: 10.1016/j.jedc.2018.06.004
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    Cited by:

    1. Philippe Choné & Lionel Wilner, 2015. "Complementarity or substitutability in networks? Methodology and application to the hospital industry," Working Papers 2015-07, Center for Research in Economics and Statistics.
    2. Ni, Jian & Zhao, Jun & Chu, Lap Keung, 2021. "Supply contracting and process innovation in a dynamic supply chain with information asymmetry," European Journal of Operational Research, Elsevier, vol. 288(2), pages 552-562.
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    4. Michele Bisceglia & Roberto Cellini & Luca Grilli, 2018. "Regional regulators in health care service under quality competition: A game theoretical model," Health Economics, John Wiley & Sons, Ltd., vol. 27(11), pages 1821-1842, November.
    5. Roberto Cellini & Domenico Lisi, 2020. "Readmission treatment price and product quality in the hospital sector," Health Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 61-71, January.
    6. Cellini, Roberto & Lisi, Domenico, 2019. "Readmission treatment price and product quality in the hospital sector: A note," MPRA Paper 92505, University Library of Munich, Germany.
    7. Ziad R. Ghandour, 2019. "Public-Private Competition in Regulated Markets," NIPE Working Papers 02/2019, NIPE - Universidade do Minho.
    8. Philippe Choné & Lionel Wilner, 2015. "Complementarity or substitutability in networks? Methodology and application to the hospital industry," Working Papers 2015-07, Center for Research in Economics and Statistics.
    9. Bisceglia, Michele & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2020. "Optimal dynamic volume-based price regulation," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    10. Bisceglia, Michele & Cellini, Roberto & Grilli, Luca, 2019. "On the optimality of the yardstick regulation in the presence of dynamic interaction," MPRA Paper 94946, University Library of Munich, Germany.

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    More about this item

    Keywords

    Differential-games; Competition; Quality;
    All these keywords.

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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