Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/30699
Authors: 
Brekke, Kurt R.
Cellini, Roberto
Siciliani, Luigi
Straume, Odd Rune
Year of Publication: 
2010
Series/Report no.: 
CESifo Working Paper 2922
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 choose the optimal quality investment plan based on demand at the initial period) and the feedback closed-loop solution (providers observe demand in each period and choose quality in response to current demand). If production costs are strictly convex, the steady state quality is higher under the open-loop solution than under the feedback solution. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state. While fiercer competition (lower transportation costs or less sluggish demand) leads to higher quality in both solutions, the quality response to increased competition is weaker when players use feedback strategies.
Subjects: 
regulated markets
competition
quality
differential games
JEL: 
H42
I18
I21
L13
L51
Document Type: 
Working Paper

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