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Department of Economics, Norwegian School of Economics (NHH) Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)

No 9/2012:
Can competition reduce quality?

Kurt R. Brekke (), Luigi Siciliani () and Odd Rune Straume ()

Abstract: We study the e¤ect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We o¤er a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. Our proposed mechanism can help explain several empirical …ndings of a negative e¤ect of competition on quality.

Keywords: Quality and price competition; Motivated providers; Risk-averse providers.; (follow links to similar papers)

JEL-Codes: D21; D43; L13; L30; (follow links to similar papers)

9 pages, April 2, 2012

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