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A dynamic model of quality competition with endogenous prices

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JournalJournal of Economic Dynamics and Control
DateAccepted/In press - 17 Jun 2018
DateE-pub ahead of print - 22 Jun 2018
DatePublished (current) - Sep 2018
Volume94
Number of pages17
Pages (from-to)190-206
Early online date22/06/18
Original languageEnglish

Abstract

We develop a dynamic model of price and quality competition in order to analyze the effects of competition on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level. Our model combines a differential-game approach with a Hotelling spatial competition framework, and our analysis applies in particular to industries such as long-term care, health care, child care and education. If providers (nursing homes, hospitals, schools, nurseries) use closed-loop decision rules, which imply strategic interaction over time, we show that, although increased competition leads to higher quality in the steady state, quality provision is nevertheless lower than under open-loop rules, and also suboptimally low from a welfare perspective. Thus, our analysis identifies dynamic strategic interaction between competing providers as a potential source of inefficiency in quality provision.

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© 2018 Elsevier B.V. All rights reserved. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

    Research areas

  • Competition, Differential-games, Quality

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