Quality and location choices under price regulation

Qualitäts- und Standortwahl bei Preisregulierung

Kurt Brekke (), Robert Nuscheler and Odd Rune Straume

No FS IV 02-28, Discussion Papers, Research Unit: Market Processes and Governance from WZB Berlin Social Science Center

Abstract: In a model of spatial competition, we analyse the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator and find that this (second-best) price causes over-investment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the cost of investing in product quality, or the transportation cost of consumers, is sufficiently high. By comparing the case of price competition, we also identify a hitherto unnoticed benefit of regulation, namely improved locational efficiency.

Keywords: Spatial competition; product quality; location; price regulation (search for similar items in EconPapers)
JEL-codes: L13 L50 R30 R38 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Quality and Location Choices under Price Regulation (2006)
Working Paper: Quality and location choices under price regulation (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wzbmpg:fsiv0228

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