Quality competition with profit constraints

Kurt Brekke (), Luigi Siciliani and Odd Rune Straume

Journal of Economic Behavior & Organization, 2012, vol. 84, issue 2, 642-659

Abstract: Firms in markets such as health care and education are often profit constrained due to regulation or their non-profit status, and they are often viewed as being altruistic towards consumers. We use a spatial competition framework to study incentives for cost containment and quality provision by altruistic firms facing profit constraints. If prices are regulated, profit constraints lead to lower cost containment efforts, but higher quality if and only if firms are sufficiently altruistic. Under price competition, profit constraints reduce quality and cost containment efforts, but lead to lower prices if and only if firms are sufficiently altruistic. Profit constrained firms’ cost containment efforts are below the first-best, while their quality might be too high or too low. If prices are regulated, profit constraints can improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.

Keywords: Profit constraints; Quality competition; Altruistic providers (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L30 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:84:y:2012:i:2:p:642-659

DOI: 10.1016/j.jebo.2012.09.006

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