Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 24/02: Quality and location choices under price regulation

Kurt R. Brekke (), Robert Nuscheler () and Odd Rune Straume ()
Additional contact information
Kurt R. Brekke: Department of Economics, Programme for Health Economics in Bergen (HEB), Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway
Robert Nuscheler: Wissenschaftszentrum Berlin für Sozialforschung (WZB).
Odd Rune Straume: Institute for Research in Economics and Business Administration, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway

Abstract: In a model of spatial competition, we analyse 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 and find that this (second-best) price causes over-investment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the cost of investing in product quality, or the transportation cost of consumers, is sufficiently high. Comparing with the case of price competition, we also identify a hitherto unnoticed benefit of regulation, namely improved locational efficiency.

Keywords: Spatial competition; Product quality; Location; Price regulation.

JEL-codes: L13; L50; R30; R38

22 pages, December 15, 2002

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