Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms?

Kurt Brekke (), Luigi Siciliani and Odd Rune Straume

No 2/2011, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: 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 qualityprice 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.

Keywords: Profit constraints; Quality competition; Semi-altruistic providers. (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L30 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2011-02-07
New Economics Papers: this item is included in nep-com, nep-ind and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.nhh.no/Admin/Public/DWSDownload.aspx?Fi ... pers%2f2011%2f02.pdf (application/pdf)

Related works:
Working Paper: Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms? (2011)
Working Paper: Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms? (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhheco:2011_002

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Synne Stormoen ().