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Can Competition Reduce Quality?

Listed author(s):
  • Kurt R. Brekke
  • Luigi Siciliani
  • Odd Rune Straume

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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-02/cesifo1_wp4629.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4629.

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Date of creation: 2014
Handle: RePEc:ces:ceswps:_4629
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  25. Hviid, Morten, 1989. "Risk-Averse Duopolists and Voluntary Information Transmission," Journal of Industrial Economics, Wiley Blackwell, vol. 38(1), pages 49-64, September.
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