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Quality competition with profit constraints

Author

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  • 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.

Suggested Citation

  • Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
  • Handle: RePEc:eee:jeborg:v:84:y:2012:i:2:p:642-659
    DOI: 10.1016/j.jebo.2012.09.006
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    Cited by:

    1. Laura Levaggi & Rosella Levaggi, 2017. "Oligopolistic competition for the provision of hospital care," Working papers 57, Società Italiana di Economia Pubblica.
    2. Kopel, Michael & Lamantia, Fabio & Szidarovszky, Ferenc, 2014. "Evolutionary competition in a mixed market with socially concerned firms," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 394-409.
    3. repec:eee:jhecon:v:55:y:2017:i:c:p:1-13 is not listed on IDEAS
    4. Kristensen, Søren Rud & Siciliani, Luigi & Sutton, Matt, 2016. "Optimal price-setting in pay for performance schemes in health care," Journal of Economic Behavior & Organization, Elsevier, vol. 123(C), pages 57-77.
    5. Kifmann, Mathias & Siciliani, Luigi, 2014. "Average-cost pricing and dynamic selection incentives in the hospital sector," hche Research Papers 2014/08, University of Hamburg, Hamburg Center for Health Economics (hche).
    6. Lisa Planer-Friedrich & Marco Sahm, 2017. "Strategic Corporate Social Responsibility," CESifo Working Paper Series 6506, CESifo Group Munich.
    7. Andrew E. Clark & Carine Milcent, 2015. "Hospital Employment and Local Unemployment: Evidence from French Health Reforms," Working Papers halshs-01183454, HAL.
    8. Siciliani, Luigi & Rune Straume, Odd & Cellini, Roberto, 2013. "Quality competition with motivated providers and sluggish demand," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2041-2061.
    9. S. Balia & R. Brau & E. Marrocu, 2014. "Free patient mobility is not a free lunch. Lessons from a decentralised NHS," Working Paper CRENoS 201409, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    10. Guccio, Calogero & Lisi, Domenico & Pignataro, Giacomo, 2014. "Readmission and Hospital Quality under Prospective Payment System," MPRA Paper 56490, University Library of Munich, Germany.
    11. Barigozzi, Francesca & Burani, Nadia, 2016. "Competition and screening with motivated health professionals," Journal of Health Economics, Elsevier, vol. 50(C), pages 358-371.
    12. Andrew E. Clark & Carine Milcent, 2018. "Ownership and Hospital Behaviour: Employment and Local Unemployment," PSE Working Papers halshs-01649493, HAL.
    13. Andrew E. Clark & Carine Milcent, 2015. "Hospital Employment and Local Unemployment: Evidence from French Health Reforms," PSE Working Papers halshs-01183454, HAL.
    14. repec:nip:nipewp:10/2014 is not listed on IDEAS
    15. repec:bla:scandj:v:119:y:2017:i:3:p:597-627 is not listed on IDEAS
    16. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Hospital Mergers with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(3), pages 597-627, July.
    17. Planer-Friedrich, Lisa & Sahm, Marco, 2017. "Strategic corporate social responsibility," BERG Working Paper Series 124, Bamberg University, Bamberg Economic Research Group.
    18. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2015. "Hospital Competition with Soft Budgets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(3), pages 1019-1048, July.
    19. Francesco Longo & Luigi Siciliani & Giuseppe Moscelli & Hugh Gravelle, 2017. "Does hospital competition improve efficiency? The effect of the patient choice reform in England," Working Papers 149cherp, Centre for Health Economics, University of York.
    20. repec:eee:socmed:v:202:y:2018:i:c:p:151-161 is not listed on IDEAS
    21. Planer-Friedrich, Lisa & Sahm, Marco, 2017. "Why Firms Should Care for All Consumers," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168257, Verein für Socialpolitik / German Economic Association.
    22. Hugh Gravelle & Giuseppe Moscelli & Rita Santos & Luigi Siciliani, 2014. "Patient choice and the effects of hospital market structure on mortality for AMI, hip fracture and stroke patients," Working Papers 106cherp, Centre for Health Economics, University of York.
    23. repec:eee:jhecon:v:57:y:2018:i:c:p:131-146 is not listed on IDEAS

    More about this item

    Keywords

    Profit constraints; Quality competition; Altruistic providers;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General

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