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Can competition reduce quality?

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Abstract

We study the effect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. 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 riskaverse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.

Suggested Citation

  • Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2012. "Can competition reduce quality?," NIPE Working Papers 05/2012, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:05/2012
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Market competition and product quality
      by Economic Logician in Economic Logic on 2012-04-18 18:15:00

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    1. repec:eee:dyncon:v:94:y:2018:i:c:p:190-206 is not listed on IDEAS
    2. Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2018. "A dynamic model of quality competition with endogenous prices," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 190-206.

    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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