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Quality and Competition between Public and Private Firms

Liisa Laine and Ching-to Ma ()

No wp2016-006, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have di§erent quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. Consumers' qualty valuations follow a general distribution. Firms' unit production cost is a an increasing and convex function of quality. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame-perfect equilibria, and provide conditions on consumer valuation distribution for first-best equilibrium qualities. Various policy implications are drawn.

Keywords: price-quality competition; quality; public firm; private firm (search for similar items in EconPapers)
JEL-codes: D4 L1 L2 L3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
Date: 2016-03
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Related works:
Journal Article: Quality and competition between public and private firms (2017) Downloads
Working Paper: Quality and Competition between Public and Private Firms (2015) Downloads
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