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A dynamic model of quality competition with endogenous prices

Author

Listed:
  • Roberto Cellini

    (Department of Economics, University of Catania)

  • Luigi Siciliani

    (Department of Economics and Related Studies, University of York)

  • Odd Rune Straume

    (Universidade do Minho - NIPE)

Abstract

We develop a dynamic model of price and quality competition in order to analyse the effects of competition intensity on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level. Using a differential-game approach with price and quality competition on a Hotelling line, we compare the benchmark open-loop solution against the feedback closed-loop solution, which implies strategic dynamic interaction over time. We find that steady-state quality in the closed-loop solution is (i) increasing in the degree of competition between firms, (ii) lower than in the open-loop solution, and (iii) lower than the socially optimal level. In contrast, steady-state quality in the open-loop solution is at the socially optimal level and independent of competition intensity. Thus, our analysis identifies dynamic strategic interactions between competing firms as an independent source of inefficiency in quality provision.

Suggested Citation

  • Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2015. "A dynamic model of quality competition with endogenous prices," NIPE Working Papers 8/2015, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:8/2015
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    6. Ni, Jian & Zhao, Jun & Chu, Lap Keung, 2021. "Supply contracting and process innovation in a dynamic supply chain with information asymmetry," European Journal of Operational Research, Elsevier, vol. 288(2), pages 552-562.
    7. Michele Bisceglia & Roberto Cellini & Luca Grilli, 2022. "On the dynamic optimality of yardstick regulation," Annals of Operations Research, Springer, vol. 315(1), pages 73-92, August.
    8. Hongfang Qiao & Xiaowei Lin & Xideng Zhou & Minglin Jiang, 2022. "Research on Joint Decision-Making of Timely Delivery, Product Quality and Marketing in Supply Chain Based on Differential Game," Sustainability, MDPI, vol. 14(17), pages 1-20, August.
    9. Michele Bisceglia & Roberto Cellini & Luca Grilli, 2019. "Quality Competition in Healthcare Services with Regional Regulators: A Differential Game Approach," Dynamic Games and Applications, Springer, vol. 9(1), pages 1-23, March.
    10. Michele Bisceglia & Roberto Cellini & Luca Grilli, 2018. "Regional regulators in health care service under quality competition: A game theoretical model," Health Economics, John Wiley & Sons, Ltd., vol. 27(11), pages 1821-1842, November.
    11. Roberto Cellini & Domenico Lisi, 2020. "Readmission treatment price and product quality in the hospital sector," Health Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 61-71, January.
    12. Okuyama, Suzuka, 2021. "Price and quality competition in a mixed duopoly : Differential game approach," MPRA Paper 110148, University Library of Munich, Germany, revised 06 Oct 2021.
    13. Cellini, Roberto & Lisi, Domenico, 2019. "Readmission treatment price and product quality in the hospital sector: A note," MPRA Paper 92505, University Library of Munich, Germany.
    14. Ziad R. Ghandour, 2019. "Public-Private Competition in Regulated Markets," NIPE Working Papers 02/2019, NIPE - Universidade do Minho.
    15. Philippe CHONÉ & Lionel WILNER, 2019. "Competition on Unobserved Attributes: The Case of the Hospital Industry," Working Papers 2019-21, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    Competition; Quality; Differential-games.;
    All these keywords.

    JEL classification:

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

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