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Competition and quality in regulated markets with sluggish demand

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  • Brekke, Kurt Richard
  • Cellini, Roberto
  • Siciliani, Luigi
  • Straume, Odd Rune

Abstract

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 commit to an optimal investment plan at the initial period) and the feedback closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal cost of provision is increasing, the steady state quality is higher under the open- loop solution than under the closed-loop solution. Fiercer competition (lower transportation costs and/or less sluggish demand) leads to higher quality in both solutions, but the quality response to increased competition is weaker when players use closed-loop strategies. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state.

Suggested Citation

  • Brekke, Kurt Richard & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and quality in regulated markets with sluggish demand," CEPR Discussion Papers 6938, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6938
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    References listed on IDEAS

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    Cited by:

    1. Siciliani, Luigi & Rune Straume, Odd & Cellini, Roberto, 2013. "Quality competition with motivated providers and sluggish demand," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2041-2061.
    2. Brekke, Kurt R. & Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2010. "Competition and quality in health care markets: A differential-game approach," Journal of Health Economics, Elsevier, vol. 29(4), pages 508-523, July.
    3. S. Balia & R. Brau & E. Marrocu, 2014. "Free patient mobility is not a free lunch. Lessons from a decentralised NHS," Working Paper CRENoS 201409, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    4. Emanuela Marrocu & Silvia Balia & Rinaldo Brau, 2016. "A spatial analysis of inter-regional patient mobility in Italy," ERSA conference papers ersa16p127, European Regional Science Association.

    More about this item

    Keywords

    competition; quality; Regulated markets;

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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