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Quality competition, welfare, and regulation

Quality competition, welfare, and regulation In this paper, we study the supply of quality in imperfectly competitive markets, and explore the role of regulation in markets where firms may use both quality and price to compete for customers. In a model where firms first choose qualities and then prices, we find that quality decisions have strategic effects: firms react to quality disadvantages by price reductions. Because of this strategic effect, firms do not have the correct incentive to set socially efficient quality levels. Price and quality competition results in a socially suboptimal quality level. Efficiency can be restored by lump-sum transfers and price regulatory policies. Simple price regulation may result in lower price and higher quality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics Springer Journals

Quality competition, welfare, and regulation

Journal of Economics , Volume 58 (2) – Feb 17, 2005

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References (11)

Publisher
Springer Journals
Copyright
Copyright © 1993 by Springer-Verlag
Subject
Economics; Economics, general; Economic Theory/Quantitative Economics/Mathematical Methods; Microeconomics; Macroeconomics/Monetary Economics//Financial Economics; Public Finance; Game Theory, Economics, Social and Behav. Sciences
ISSN
0931-8658
eISSN
1617-7134
DOI
10.1007/BF01253480
Publisher site
See Article on Publisher Site

Abstract

In this paper, we study the supply of quality in imperfectly competitive markets, and explore the role of regulation in markets where firms may use both quality and price to compete for customers. In a model where firms first choose qualities and then prices, we find that quality decisions have strategic effects: firms react to quality disadvantages by price reductions. Because of this strategic effect, firms do not have the correct incentive to set socially efficient quality levels. Price and quality competition results in a socially suboptimal quality level. Efficiency can be restored by lump-sum transfers and price regulatory policies. Simple price regulation may result in lower price and higher quality.

Journal

Journal of EconomicsSpringer Journals

Published: Feb 17, 2005

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