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Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms?

Author

Listed:
  • Brekke, Kurt R.

    () (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Siciliani, Luigi

    () (University of York)

  • Straume, Odd Rune

    () (University of Minho)

Abstract

In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and qualityprice competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may 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, 2011. "Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms?," Discussion Paper Series in Economics 2/2011, Norwegian School of Economics, Department of Economics.
  • Handle: RePEc:hhs:nhheco:2011_002
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Alessandro Fedele & Raffaele Miniaci, 2012. "�Stakeholder Orientation� and Capital Structure: Social Enterprises Versus For-profit Firms in the Italian Social Residential Service Sector," Euricse Working Papers 1233, Euricse (European Research Institute on Cooperative and Social Enterprises).

    More about this item

    Keywords

    Profit constraints; Quality competition; Semi-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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