Competition and quality in regulated markets with sluggish demand

Roberto Cellini, Kurt Brekke () and Luigi Siciliani
Authors registered in the RePEc Author Service: Odd Rune Straume

No 6938, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Competition; Quality; Regulated markets (search for similar items in EconPapers)
JEL-codes: H42 I11 I18 L13 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-com, nep-ene and nep-mic
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Working Paper: Competition and Quality in Regulated Markets with Sluggish Demand (2010)
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