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Competition and Quality in Regulated Markets with Sluggish Demand

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

We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities), using a Hotelling framework, in the presence of sluggish demand. We take a differential-game approach, and derive the open-loop solution (providers choose the optimal quality investment plan based on demand at the initial period) and the feedback closed-loop solution (providers observe demand in each period and choose quality in response to current demand). If production costs are strictly convex, the steady state quality is higher under the open-loop solution than under the feedback solution. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state. While fiercer competition (lower transportation costs or less sluggish demand) leads to higher quality in both solutions, the quality response to increased competition is weaker when players use feedback strategies.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2922.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2922
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  1. Kurt R. Brekke & Robert Nuscheler & Odd Rune Straume, 2005. "Gatekeeping in Health Care," CESifo Working Paper Series 1552, CESifo Group Munich.
  2. Brekke, Kurt Richard & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and Quality in Regulated Markets: a Differential-Game Approach," CEPR Discussion Papers 6801, C.E.P.R. Discussion Papers.
  3. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-64, September.
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  6. Cellini, Roberto & Lambertini, Luca, 2007. "A differential oligopoly game with differentiated goods and sticky prices," European Journal of Operational Research, Elsevier, vol. 176(2), pages 1131-1144, January.
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  8. Neven, D. & Thisse, J-F., 1989. "On Quality And Variety Competition," CORE Discussion Papers 1989020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. DEL REY, Elena, 2000. "Teaching versus research: a model of state university competition," CORE Discussion Papers 2000030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Gianni De Fraja & Pedro Landeras, 2004. "Could do Better: The Effectiveness of Incentives and Competition in Schools," CEIS Research Paper 48, Tor Vergata University, CEIS.
  11. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
  12. Dee, Thomas S., 1998. "Competition and the quality of public schools," Economics of Education Review, Elsevier, vol. 17(4), pages 419-427, October.
  13. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
  14. Karlsson, Martin, 2007. "Quality incentives for GPs in a regulated market," Journal of Health Economics, Elsevier, vol. 26(4), pages 699-720, July.
  15. Martin Gaynor, . "What Do We Know About Competition and Quality in Health Care Markets?," GSIA Working Papers 2006-E62, Carnegie Mellon University, Tepper School of Business.
  16. 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.
  17. Tay, Abigail, 2003. " Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
  18. Didier Laussel & Maxime de Montmarin & Ngo Van Long, 2004. "Dynamic Duopoly with Congestion Effects," CIRANO Working Papers 2004s-09, CIRANO.
  19. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
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  21. Thomas P. Lyon, 1999. "Quality Competition, Insurance, and Consumer Choice in Health Care Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 546-580, December.
  22. repec:cup:cbooks:9780521331586 is not listed on IDEAS
  23. Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer, vol. 13(5), pages 509-522, October.
  24. Caroline Minter Hoxby, 1994. "Does Competition Among Public Schools Benefit Students and Taxpayers?," NBER Working Papers 4979, National Bureau of Economic Research, Inc.
  25. 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.
  26. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation
    [Qualitäts- und Standortwahl bei Preisregulierung]
    ," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-28, Social Science Research Center Berlin (WZB).
  27. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  28. Burns, Lawton R. & Wholey, Douglas R., 1992. "The impact of physician characteristics in conditional choice models for hospital care," Journal of Health Economics, Elsevier, vol. 11(1), pages 43-62, May.
  29. Dockner, Engelbert J, 1992. "A Dynamic Theory of Conjectural Variations," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 377-95, December.
  30. De Fraja, Gianni & Iossa, Elisabetta, 2002. "Competition among Universities and the Emergence of the Elite Institution," Bulletin of Economic Research, Wiley Blackwell, vol. 54(3), pages 275-93, July.
  31. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 577-615, May.
  32. Hodgkin, Dominic, 1996. "Specialized service offerings and patients' choice of hospital: The case of cardiac catheterization," Journal of Health Economics, Elsevier, vol. 15(3), pages 305-332, June.
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  34. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
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