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Quality and location choices under price regulation
[Qualitäts- und Standortwahl bei Preisregulierung]

Author

Listed:
  • Brekke, Kurt R.
  • Nuscheler, Robert
  • Straume, Odd Rune

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. By comparing 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
    [Qualitäts- und Standortwahl bei Preisregulierung]
    ," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-28, Social Science Research Center Berlin (WZB).
  • Handle: RePEc:zbw:wzbmpg:fsiv0228
    as

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    References listed on IDEAS

    as
    1. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
    2. Gravelle, Hugh & Masiero, Giuliano, 2000. "Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice," Journal of Health Economics, Elsevier, vol. 19(6), pages 1067-1088, November.
    3. Anderson, Simon P & Engers, Maxim, 1994. "Spatial Competition with Price-Taking Firms," Economica, London School of Economics and Political Science, vol. 61(242), pages 125-136, May.
    4. Jeroen Hinloopen, 2002. "Price regulation in a spatial duopoly with possible non-buyers," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 36(1), pages 19-39.
    5. Robert Nuscheler, 2003. "Physician Reimbursement, Time-Consistency and the Quality of Care," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(2), pages 302-302, June.
    6. Asher Wolinsky, 1997. "Regulation of Duopoly: Managed Competition vs Regulated Monopolies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 821-847, December.
    7. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    8. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
    9. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Spatial competition; product quality; location; price regulation;

    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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