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Can Competition Reduce Quality?

Kurt R. Brekke, Luigi Siciliani () and Odd Rune Straume ()

Journal of Institutional and Theoretical Economics (JITE), 2018, vol. 174, issue 3, 421-447

Abstract: We analyze the effect of competition on quality provision in spatial markets where providers compete in both price and quality (e.g., health care, long-term care, child care, education). By making two key assumptions about the providers in such markets, namely that they are (partly) motivated and have decreasing marginal utility of income, we find, contrary to the existing literature, an unambiguously negative relationship between competition intensity and quality provision. This relationship holds regardless of whether quality and price decisions are made simultaneously or sequentially. However, even if competition reduces quality, it does not necessarily follow that social welfare is reduced.

Keywords: quality and price competition; motivated providers; decreasing marginal utility of income (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L30 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Can Competition Reduce Quality? (2014) Downloads
Working Paper: Can competition reduce quality? (2014) Downloads
Working Paper: Can competition reduce quality? (2012) Downloads
Working Paper: Can competition reduce quality? (2012) Downloads
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DOI: 10.1628/093245617X15010500333985

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