A dynamic model of quality competition with endogenous prices

Roberto Cellini, Luigi Siciliani and Odd Rune Straume

No 8/2015, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We develop a dynamic model of price and quality competition in order to analyse the effects of competition intensity on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level. Using a differential-game approach with price and quality competition on a Hotelling line, we compare the benchmark open-loop solution against the feedback closed-loop solution, which implies strategic dynamic interaction over time. We find that steady-state quality in the closed-loop solution is (i) increasing in the degree of competition between firms, (ii) lower than in the open-loop solution, and (iii) lower than the socially optimal level. In contrast, steady-state quality in the open-loop solution is at the socially optimal level and independent of competition intensity. Thus, our analysis identifies dynamic strategic interactions between competing firms as an independent source of inefficiency in quality provision.

Keywords: Competition; Quality; Differential-games. (search for similar items in EconPapers)
JEL-codes: H42 I11 L13 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: A dynamic model of quality competition with endogenous prices (2018)
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