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Can Competition Reduce Quality?Kurt Richard BrekkeNorwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Luigi SicilianiUniversity of York (UK) Odd Rune StraumeUniversity of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) March 28, 2012 NHH Dept. of Economics Discussion Paper No. 9/2012 Abstract: We study the effect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.
Number of Pages in PDF File: 14 Keywords: Quality and price competition, Motivated providers, Risk-averse providers JEL Classification: D21, D43, L13, L30 working papers seriesDate posted: April 2, 2012Suggested CitationContact Information
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