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 05/2011, NIPE Working Papers from NIPE - Universidade do Minho

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 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.

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)
Date: 2011
New Economics Papers: this item is included in nep-com, nep-ind and nep-reg
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Citations: View citations in EconPapers (7)

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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)
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