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Quality competition with profit constraints

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Author Info

  • Brekke, Kurt R.
  • Siciliani, Luigi
  • Straume, Odd Rune

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 2 ()
Pages: 642-659

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:2:p:642-659

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Profit constraints; Quality competition; Altruistic providers;

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References

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Cited by:
  1. Guccio, Calogero & Lisi, Domenico & Pignataro, Giacomo, 2014. "Readmission and Hospital Quality under Prospective Payment System," MPRA Paper 56490, University Library of Munich, Germany.
  2. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2013. "Hospital Competition with Soft Budgets," CESifo Working Paper Series 4073, CESifo Group Munich.
  3. Luigi Siciliani & Odd Rune Straume & Roberto Cellini, . "Quality competition with motivated providers and sluggish demand," Discussion Papers 11/09, Department of Economics, University of York.
  4. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2014. "Hospital Mergers with Regulated Prices," NIPE Working Papers 10/2014, NIPE - Universidade do Minho.

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