Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/36422

TitleA dynamic model of quality competition with endogenous prices
Author(s)Cellini, Roberto
Siciliani, Luigi
Straume, Odd Rune
KeywordsCompetition
Quality
Differential-games
Issue date2015
PublisherUniversidade do Minho. Núcleo de Investigação em Políticas Económicas (NIPE)
Abstract(s)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.
TypeWorking paper
URIhttp://hdl.handle.net/1822/36422
Publisher versionhttp://www.nipe.eeg.uminho.pt/Uploads/WP_2015/NIPE_WP_08_2015.pdf
Peer-Reviewedno
AccessOpen access
Appears in Collections:NIPE - Documentos de Trabalho

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