Ensuring quality provision in deregulated industry
(2002)
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- Abstract
- The deregulation of public monopolies has often generated a decrease in quality and reliability of service. Governments have coped with this issue by imposing Minimum Quality Standards (MQS) to entrants but a recent stream of literature has raised concerns about the inadequacy of this instrument. We propose an alternative, a sales quota to be imposed on the incumbent, to overcome the competition effects that tend to generate quality downgrading. In our model an entrant invests into quality because the limit on the incumbent sales eliminates price wars and enable him (as well as the incumbent) to recoup investments in quality. The maximal welfare is obtained when the sales quota is xed at 71% of the initial market. Laisser-faire leads to entrant s differentiation and a welfare of 91, 6% of the Pareto optimum while our solution leads to a welfare of 99, 4%. To reach this level a MQS should be set 66% above the ideal level chosen by the entrant under laisser-faire.
- Affiliations
Citations
Boccard, N., & Wauthy, X. (2002). Ensuring quality provision in deregulated industry (CEREC Working Papers 2002/1).