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Quality and Competition between Public and Private Firms

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  • Liisa Laine

    (Boston University and Dand School of Business and Economics, University of Jyvaskyla)

  • Ching-To Albert Ma

    (Boston University)

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 different 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. 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 for general consumer valuation distributions and quality cost functions, and provide conditions for first-best equilibrium qualities. Various policy implications are drawn.

Suggested Citation

  • Liisa Laine & Ching-To Albert Ma, 2015. "Quality and Competition between Public and Private Firms," Boston University - Department of Economics - Working Papers Series wp2015-005, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2015-005
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    Cited by:

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    2. Besley, Timothy J. & Malcomson, James M, 2016. "Choice and Competition in Public Service Provision," CEPR Discussion Papers 11441, C.E.P.R. Discussion Papers.
    3. Besley, Timothy & Malcomson, James M., 2018. "Competition in public service provision: The role of not-for-profit providers," Journal of Public Economics, Elsevier, vol. 162(C), pages 158-172.
    4. Wang, Xingtang & Wang, Leonard F.S., 2021. "Vertical product differentiation, managerial delegation and social welfare in a vertically-related market," Mathematical Social Sciences, Elsevier, vol. 113(C), pages 149-159.
    5. Nadia Burani, 2021. "No mission? No motivation. On hospitals' organizational form and charity care provision," Health Economics, John Wiley & Sons, Ltd., vol. 30(12), pages 3203-3219, December.
    6. Levaggi, Laura & Levaggi, Rosella, 2020. "Is there scope for mixed markets in the provision of hospital care?," Social Science & Medicine, Elsevier, vol. 247(C).
    7. Horn-In Kuo & Fu-Chuan Lai & K. L. Glen Ueng, 2020. "Privatization neutrality with quality and subsidies," The Japanese Economic Review, Springer, vol. 71(3), pages 405-419, July.
    8. Amelio, Andrea & Giardino-Karlinger, Liliane & Valletti, Tommaso, 2020. "Exclusionary pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    9. Laine, Liisa T. & Ma, Ching-to Albert, 2017. "Quality and competition between public and private firms," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 336-353.
    10. Shin, Hoon C. & Vallury, Sechindra & Abbott, Joshua K. & Anderies, John M. & Yu, David J., 2022. "Understanding the effects of institutional diversity on irrigation systems dynamics," Ecological Economics, Elsevier, vol. 191(C).
    11. Benassi, Corrado & Castellani, Massimiliano & Mussoni, Maurizio, 2016. "Price equilibrium and willingness to pay in a vertically differentiated mixed duopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 86-96.
    12. Okuyama, Suzuka, 2021. "Price and quality competition in a mixed duopoly : Differential game approach," MPRA Paper 110148, University Library of Munich, Germany, revised 06 Oct 2021.
    13. Ziad Ghandour & Luigi Siciliani & Odd Rune Straume, 2021. "Investment and Quality Competition in Healthcare Markets," NIPE Working Papers 03/2021, NIPE - Universidade do Minho.
    14. Hehenkamp, Burkhard & Kaarbøe, Oddvar M., 2020. "Location choice and quality competition in mixed hospital markets," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 641-660.
    15. Ziad R. Ghandour, 2019. "Public-Private Competition in Regulated Markets," NIPE Working Papers 02/2019, NIPE - Universidade do Minho.
    16. Gravelle, Hugh & Schroyen, Fred, 2020. "Optimal hospital payment rules under rationing by waiting," Journal of Health Economics, Elsevier, vol. 70(C).

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    More about this item

    Keywords

    price-quality competition; quality; public firm; private firm;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise

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