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Price and quality in spatial competition

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  • Brekke, Kurt R.
  • Siciliani, Luigi
  • Straume, Odd Rune

Abstract

We study the relationship between competition and quality within a spatial competition framework where firms compete in prices and quality. We generalise existing literature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship between competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the number of firms and equilibrium quality. This reversal result is further strengthened if there are cost substitutabilities between output and quality. Equilibrium quality provision is always less than socially optimal in the presence of income effects.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:regeco:v:40:y:2010:i:6:p:471-480
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    Cited by:

    1. Roberto Cellini & Luigi Siciliani & Odd Rune Straume, "undated". "A dynamic model of quality competition with endogenous prices," NIPE Working Papers 8/2015, NIPE - Universidade do Minho.
    2. Hugh Gravelle & Anthony Scott & Peter Sivey & Jongsay Yong, 2016. "Competition, prices and quality in the market for physician consultations," Journal of Industrial Economics, Wiley Blackwell, vol. 64(1), pages 135-169, March.
    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. Laura Di Giorgio & Massimo Filippini & Giuliano Masiero, 2014. "The relationship between costs and quality in nonprofit nursing homes," IdEP Economic Papers 1402, USI Università della Svizzera italiana.
    5. Heyes, Anthony & Martin, Steve, 2016. "Fuzzy products," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 1-9.
    6. repec:eee:regeco:v:64:y:2017:i:c:p:117-136 is not listed on IDEAS
    7. Nagurney, Anna & Saberi, Sara & Shukla, Shivani & Floden, Jonas, 2015. "Supply chain network competition in price and quality with multiple manufacturers and freight service providers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 77(C), pages 248-267.
    8. 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.
    9. Filippini, M. & Heimsch, F. & Masiero, G., 2014. "Antibiotic consumption and the role of dispensing physicians," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 242-251.
    10. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Can competition reduce quality?," Discussion Paper Series in Economics 9/2012, Norwegian School of Economics, Department of Economics.
    11. Rita Santos & Hugh Gravelle & Carol Propper, 2013. "Does quality affect patients’ choice of doctor? Evidence from the UK," Working Papers 088cherp, Centre for Health Economics, University of York.
    12. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Horizontal mergers and product quality," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 1063-1103, November.
    13. Maija Halonen-Akatwijuka & Carol Propper, 2012. "Competition, Equity and Quality in Health Care," The Centre for Market and Public Organisation 12/296, Department of Economics, University of Bristol, UK.
    14. Dieter Pennerstorfer, 2014. "Price and Quality Competition in Spatial Markets. The Case of Camping Sites," WIFO Working Papers 466, WIFO.
    15. Rita Santos & Hugh Gravelle & Carol Propper, 2013. "Does quality affect patients’ choice of doctor? Evidence from the UK," The Centre for Market and Public Organisation 13/306, Department of Economics, University of Bristol, UK.
    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. Peran van Reeven & Enrico Pennings, 2016. "On the relation between multimarket contact and service quality: Mutual forbearance or network coordination?," Strategic Management Journal, Wiley Blackwell, vol. 37(10), pages 2121-2134, October.
    19. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2013. "Hospital Mergers: A Spatial Competition Approach," Discussion Paper Series in Economics 8/2013, Norwegian School of Economics, Department of Economics.
    20. repec:nip:nipewp:08/2015 is not listed on IDEAS
    21. Alexander Karpov, 2016. "Health care inequality, patient mobility and welfare," Economics Bulletin, AccessEcon, vol. 36(2), pages 1000-1009.
    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. Bacchiega, Emanuele & Randon, Emanuela & Zirulia, Lorenzo, 2012. "Strategic accessibility competition," Research in Economics, Elsevier, vol. 66(2), pages 195-212.

    More about this item

    Keywords

    Spatial competition Quality Income effects;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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