DEREGULATION AND QUALITY

This paper analyses, within a static model, the effect of quality conc ern on optimal market structure. It focuses on cases where industry qu ality has public-good like features and is not contractible. It is sho wn that the introduction of competition raises a free-rider problem wh ich depresses quality (the smaller producer free-rides on its competit or investment which as a result underinvests). To encourage the effici ent producer to provide quality, the regulator diminishes the market-s hare of the opportunistic producer and chooses more often a monopoly. However, when quality is verifiable the introduction of competition en tails no welfare loss whether the regulator observes total quality out come or individual contributions. (C) 1998 Elsevier Science B.V.