Competition and quality in regulated markets with sluggish demand

Kurt Richard Brekke, Roberto Cellini (), Luigi Siciliani () and 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)
New Economics Papers: this item is included in nep-com, nep-ene and nep-mic
Date: 2008-08
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