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The Property Rights Theory of the Firm and Mixed Competition: A Counter-Example in the US Health Care Industry

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  • Daniel Friesner
  • Robert Rosenman

Abstract

We present a counter-example to the conventional property rights theory of the firm, which indicates that not-for-profit firms are incapable of directly competing against strictly profit-maximizing firms without the presence of barriers to entry, outside assistance, changing profit status or economies of scale and scope. We employ a modified Bertrand duopoly model of mixed competition in the health care industry to show that, even when these four conditions do not hold, not-for-profit firms may still be able to compete and possibly dominate the market. Consequently, market fundamentals, rather than market intervention, regulation or uncertainty, determine a not-for-profit provider's success or failure in the market. A necessary requirement is that the not-for-profit manager must care about non-pecuniary benefits but be willing to accept lower than normal returns. Moreover, under specific cost and demand conditions, a not-for-profit's ability to compete may actually be enhanced by increasing its production of non-pecuniary benefits.

Suggested Citation

  • Daniel Friesner & Robert Rosenman, 2001. "The Property Rights Theory of the Firm and Mixed Competition: A Counter-Example in the US Health Care Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 8(3), pages 437-450.
  • Handle: RePEc:taf:ijecbs:v:8:y:2001:i:3:p:437-450
    DOI: 10.1080/13571510110081204
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    2. Frech, H E, III, 1976. "The Property Rights Theory of the Firm: Empirical Results from a Natural Experiment," Journal of Political Economy, University of Chicago Press, vol. 84(1), pages 143-152, February.
    3. Sloan, Frank A. & Picone, Gabriel A. & TaylorJr., Donald H. & Chou, Shin-Yi, 2001. "Hospital ownership and cost and quality of care: is there a dime's worth of difference?," Journal of Health Economics, Elsevier, vol. 20(1), pages 1-21, January.
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    7. Hirth, Richard A., 1999. "Consumer information and competition between nonprofit and for-profit nursing homes," Journal of Health Economics, Elsevier, vol. 18(2), pages 219-240, April.
    8. John C. Panzar & Robert D. Willig, 1977. "Economies of Scale in Multi-Output Production," The Quarterly Journal of Economics, Oxford University Press, vol. 91(3), pages 481-493.
    9. Robert Rosenman & Tong Li & Dan Friesner, 2000. "Grants and cost shifting in outpatient clinics," Applied Economics, Taylor & Francis Journals, vol. 32(7), pages 835-843.
    10. Gertler, Paul J., 1989. "Subsidies, quality, and the regulation of nursing homes," Journal of Public Economics, Elsevier, vol. 38(1), pages 33-52, February.
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    Cited by:

    1. Petra Brhlikova & Andeas Ortmann, 2006. "The Impact of the Non-distribution Constraint and Its Enforcement on Entrepreneurial Choice, Price, and Quality," CERGE-EI Working Papers wp299, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Petra Brhlikova, 2006. "Mixed Competition and Welfare under Various Nonprofit Objectives Mixed Competition under Various Cost Configurations," CERGE-EI Working Papers wp310, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Robert Rosenman & Daniel Friesner & Christopher Stevens, 2005. "Do Health Care Providers Quality Discriminate? Empirical Evidence from Primary Care Outpatient Clinics," Eastern Economic Journal, Eastern Economic Association, vol. 31(4), pages 649-670, Fall.
    4. Daniel Friesner & Robert Rosenman, 2002. "A Dynamic Property Rights Theory of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 311-333.

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