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Competition and quality in regulated markets: a differential-game approach

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Author Info
Kurt R. Brekke () (Department of Economics, Norwegian School of Economics and Business Administration, and Health Economics Bergen)
Roberto Cellini () (Department of Economics, University of Catania)
Luigi Siciliani () (Department of Economics and Related Studies, and Centre for Health Economics, University of York)
Odd Rune Straume () (Universidade do Minho - NIPE)

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Abstract

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.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 08/2008.

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Date of creation: 2008
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Handle: RePEc:nip:nipewp:08/2008

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Related research
Keywords: Regulated markets; Competition; Quality.;

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Find related papers by JEL classification:
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fernando Alexandre & Miguel Portela & Carla Sá, 2008. "Admission conditions and graduates' employability," NIPE Working Papers 16/2008, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
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