Quality competition with profit constraints : do non-profit firms provide highe...

• Author(s): Brekke, Kurt R. ; Siciliani, Luigi ; Straume, Odd Rune
• Date: 2011
• Persistent ID: http://hdl.handle.net/1822/11996
• Origin: RepositóriUM - Universidade do Minho
• Subject(s): Profit constraints Semi-altruistic providers; Quality competition; Semi-altruistic providers
• Document Type: Research paper
• Language: English

Description

In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and quality price competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.