Posted by Kathryn Schwartz on August 06, 2014

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Higher rents are associated with significantly more price dispersion, higher maximum, and higher average prices for all age groups. Higher wages, however, have surprisingly little effect on price distributions. Work by Mukeijee and Witte (1993) and Mocan (1995) suggests that higher wages are associated with significantly higher costs for child care centers. These results led us to expect a positive effect of wages on maximum and average prices.

If anything, we find some evidence that wages actually reduce maximum price for infant care. A potential explanation may lie in understanding the effect of higher wages on quality competition. If higher wages prohibitively raise the cost of high quality care, firms may choose not to differentiate as much in the quality spectrum (see Ronnen (1991)), which would in turn intensify price competition and reduce maximum and average price.

Quality Distributions

In this section, we empirically study the effects of information provision on the distribution of staff/child ratios. Staff/child ratios are a widely watched measure of observable quality and are considered to be an important determinant of good quality care.

A well-established result is that price competition erodes unobservable quality. No one has, as far as we are aware, explicitly modeled the effects of information on observable product quality. Ronnen (1991) studies the strategic behavior of firms that compete in both price and perfectly observable quality. He shows, in a model where consumers have full information, that firms differentiate themselves in the quality spectrum in order to soften subsequent price competition. Specifically, he shows that firms will increase quality differentiation, thus raising quality dispersion, in response to mechanisms that intensify price competition. Since better information may increase price competition, we might expect markets with better information (i.e, markets with R&Rs) to have higher quality all other things equal.

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