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Quality and Location Choices under Price Regulation

Quality and Location Choices under Price Regulation In a model of spatial competition, we analyze 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. If the regulator can commit to a price prior to the choice of locations, the optimal (second‐best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first‐best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first‐best quality, but horizontal differentiation is inefficiently high. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Quality and Location Choices under Price Regulation

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References (18)

Publisher
Wiley
Copyright
Copyright © 2006 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/j.1530-9134.2006.00098.x
Publisher site
See Article on Publisher Site

Abstract

In a model of spatial competition, we analyze 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. If the regulator can commit to a price prior to the choice of locations, the optimal (second‐best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first‐best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first‐best quality, but horizontal differentiation is inefficiently high.

Journal

Journal of Economics & Management StrategyWiley

Published: Mar 1, 2006

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