Can competition reduce quality?

• Author(s): Brekke, Kurt R. ; Siciliani, Luigi ; Straume, Odd Rune
• Date: 2012
• Persistent ID: http://hdl.handle.net/1822/18373
• Origin: RepositóriUM - Universidade do Minho
• Subject(s): Quality and price competition; Motivated providers; Risk-averse providers
• Document Type: Research paper
• Language: English

Description

We study the effect 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 offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and riskaverse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.