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Quality and Location Choices under Price Regulation
Author(s) -
Brekke Kurt R.,
Nuscheler Robert,
Rune Straume Odd
Publication year - 2006
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2006.00098.x
Subject(s) - commit , competition (biology) , microeconomics , economics , product differentiation , quality (philosophy) , regulator , product (mathematics) , set (abstract data type) , econometrics , mathematics , computer science , cournot competition , ecology , philosophy , biochemistry , chemistry , geometry , epistemology , database , gene , programming language , biology
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.