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Quality and location choices under price regulation

Author

Listed:
  • Brekke, Kurt R.

    (Department of Economics, Programme for Health Economics in Bergen (HEB))

  • Nuscheler, Robert

    (Wissenschaftszentrum Berlin für Sozialforschung (WZB).)

  • Straume, Odd Rune

    (Institute for Research in Economics and Business Administration)

Abstract

In a model of spatial competition, we analyse the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator and find that this (second-best) price causes over-investment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the cost of investing in product quality, or the transportation cost of consumers, is sufficiently high. Comparing with the case of price competition, we also identify a hitherto unnoticed benefit of regulation, namely improved locational efficiency.

Suggested Citation

  • Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation," Working Papers in Economics 24/02, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2002_024
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Spatial competition; Product quality; Location; Price regulation.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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