Can competition reduce quality?

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

No 9810, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a spatial competition setting there is usually a non-negative relationship between competition and quality. In this paper 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 risk-averse. We show that the negative relationship between competition and quality is robust to any given number of fims in the market and whether quality and price decisions are simultaneous or sequential. We also show that competition may improve social welfare despite the adverse effect on quality. Our proposed mechanism can help explain empirical findings of a negative effect of competition on quality in markets such as health care, long-term care, and higher education.

Keywords: Motivated providers; Quality and price competition; Risk-averse providers (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L30 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Can Competition Reduce Quality? (2018)
Working Paper: Can Competition Reduce Quality? (2014)
Working Paper: Can competition reduce quality? (2012)
Working Paper: Can competition reduce quality? (2012)
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