Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 9/2012: Can competition reduce quality?

Kurt R. Brekke (), Luigi Siciliani () and Odd Rune Straume ()
Additional contact information
Kurt R. Brekke: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Luigi Siciliani: University of York, Postal: Department of Economics and Centre for Health Economics, , University of York, Heslington, York YO010 5DD, UK
Odd Rune Straume: University of Minho, Postal: Department of Economics/NIPE, University of Minho, Campus de Gualtar , 4710-057 Braga, Portugal

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.

JEL-codes: D21; D43; L13; L30

9 pages, April 2, 2012

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