Empirical Evidence on Price and Quality Competition in Spatial Markets

Supplying high quality products is of great importance in markets characterised by vertical product differentiation, as consumers are willing to pay huge mark-ups for high quality goods. Most retail markets are characterised by vertical (quality) and horizontal (spatial) product differentiation. While the dampening effect of tough competition on prices is well established, its effect on product quality is ambiguous in theoretical models and empirical evidence is scarce. In this project we analyse the impact of the intensity of competition on these two strategic variables, utilising a data set containing 5,400 camping sites in 35 European countries with consistent information on prices, quality, location and other site characteristics. With this approach we model price and quality competition between firms in the proximity directly, picture the interrelation between price and quality, and can therefore identify the (direct) effect of competition on the two strategic variables.