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Can Competition Reduce Quality?

Author

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

Abstract

In a spatial competition setting there is usually a non-negative relationship between competition and quality. In this paper we offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. We show that the negative relationship between competition and quality is robust to any given number of firms in the market and whether quality and price decisions are simultaneous or sequential. We also show that competition may improve social welfare despite the adverse effect on quality. Our proposed mechanism can help explain empirical findings of a negative effect of competition on quality in markets such as health care, long-term care, and higher education.

Suggested Citation

  • Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2014. "Can Competition Reduce Quality?," CESifo Working Paper Series 4629, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4629
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    References listed on IDEAS

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    Citations

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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.

    More about this item

    Keywords

    quality and price competition; motivated providers; risk-averse providers;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General

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