Price and quality in spatial competition

Kurt R. Brekke (), Luigi Siciliani () and Odd Rune Straume ()
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Kurt R. Brekke: Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration, http://www.nhh.no/Default.aspx?ID=699

No 21/2009, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We study the relationship between competition and quality within a spatial competition framework where firms compete in prices and quality. We generalise existing literature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship between competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the number of firms and equilibrium quality. This reversal result is further strenghtened if there are cost substitutabilities between output and quality. Equilibrium quality provision is always less than socially optimal in the presence of income effects.

Keywords: Spatial competition; Quality; Income effects. (search for similar items in EconPapers)
JEL-codes: D21 L13 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-geo, nep-mic and nep-ure
Date: 2009
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Working Paper: Price and quality in spatial competition (2009)
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