Abstract

http://ssrn.com/abstract=1143164
 
 

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Competition and Quality in Regulated Markets: A Differential-Game Approach


Kurt Richard Brekke


Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Roberto Cellini


University of Catania - Department of Economics and Business

Luigi Siciliani


University of York

Odd Rune Straume


University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

April 2008

CEPR Discussion Paper No. DP6801

Abstract:     
We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a differential game approach, in which quality is a stock variable. Using a Hotelling framework, we 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 provision cost is constant, the open-loop and closed-loop solutions coincide, and the results are similar to the ones obtained by static models. If the marginal provision cost is increasing, investment and quality are lower in the closed-loop solution: in fact, quality drops to the minimum level in steady state, implying that quality competition is effectively eliminated. In this case, static models tend to exaggerate the positive effect of competition on quality. Our results can explain the mixed empirical evidence on competition and quality for regulated markets.

Number of Pages in PDF File: 36

Keywords: Competition, Quality, Regulated markets

JEL Classification: H42, I11, I18, L13

working papers series





Date posted: June 12, 2008  

Suggested Citation

Brekke, Kurt Richard and Cellini, Roberto and Siciliani, Luigi and Straume, Odd Rune, Competition and Quality in Regulated Markets: A Differential-Game Approach (April 2008). , Vol. , pp. -, 2008. Available at SSRN: http://ssrn.com/abstract=1143164

Contact Information

Kurt Richard Brekke (Contact Author)
Norwegian School of Economics (NHH) - Department of Economics ( email )
Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Roberto Cellini
University of Catania - Department of Economics and Business ( email )
Corso Italia 55
95129 Catania, 95129
Italy
+390957537728 (Phone)
+390957537710 (Fax)
Luigi Siciliani
University of York ( email )
Heslington
York, YO10 5DD
United Kingdom
Odd Rune Straume
University of Minho - Economic Policies Research Unit (NIPE) ( email )
Campus de Gualtar
Braga, 4710-057
Portugal
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
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