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Title: Competition and quality in regulated markets with sluggish demand

Author(s): Kurt Richard Brekke, Roberto Cellini, Luigi Siciliani and Odd Rune Straume

Publication Date: August 2008

Keyword(s): competition, quality and Regulated markets

Programme Area(s): Industrial Organization

Abstract: We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities), using a Hotelling framework, in the presence of sluggish demand. We take a differential game approach, and 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 cost of provision is increasing, the steady state quality is higher under the open- loop solution than under the closed-loop solution. Fiercer competition (lower transportation costs and/or less sluggish demand) leads to higher quality in both solutions, but the quality response to increased competition is weaker when players use closed-loop strategies. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state.

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Bibliographic Reference

Brekke, K, Cellini, R, Siciliani, L and Straume, O. 2008. 'Competition and quality in regulated markets with sluggish demand'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6938