Price and Quality in Spatial Competition

We study the relationship between competition and quality within a spatial \ncompetition framework where firms compete in prices and quality. We generalise existing\nliterature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship\nbetween competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the\nnumber of firms and equilibrium quality. This reversal result is further strenghtened\nif there are cost substitutabilities between output and quality. Equilibrium quality\nprovision is always less than socially optimal in the presence of income effects.