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

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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.

Suggested Citation

  • Kurt R. Brekke & Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2008. "Competition and quality in regulated markets: a differential-game approach," NIPE Working Papers 08/2008, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:08/2008
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    Cited by:

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    2. Cellini, Roberto & Brekke, Kurt Richard & Siciliani, Luigi, 2008. "Competition and quality in regulated markets with sluggish demand," CEPR Discussion Papers 6938, C.E.P.R. Discussion Papers.
    3. Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2010. "Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter," TSE Working Papers 10-164, Toulouse School of Economics (TSE).
    4. Fernando Alexandre & Miguel Portela & Carla Sá, 2008. "Admission conditions and graduates' employability," NIPE Working Papers 16/2008, NIPE - Universidade do Minho.
    5. Hugh Gravelle & Rita Santos & Luigi Siciliani & Rosalind Goudie, 2012. "Hospital Quality Competition Under Fixed Prices," Working Papers 080cherp, Centre for Health Economics, University of York.

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    More about this item

    Keywords

    Regulated markets; Competition; Quality.;
    All these keywords.

    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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