Please use this identifier to cite or link to this item: http://hdl.handle.net/1822/7725

TitleCompetition and quality in regulated markets: a differential-game approach
Author(s)Brekke, Kurt R.
Cellini, Roberto
Siciliani, Luigi
Straume, Odd Rune
KeywordsRegulated markets
Competition
Quality
Issue date2008
PublisherUniversidade do Minho. Núcleo de Investigação em Políticas Económicas (NIPE)
Citation"NIPE Working Paper". 8 (2008) 1-37.
Abstract(s)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 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, implying that static models are robust to a dynamic specification. 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.
TypeWorking paper
URIhttp://hdl.handle.net/1822/7725
AccessOpen access
Appears in Collections:NIPE - Documentos de Trabalho

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