Quality Competition with Profit Constraints: Do Non-Profit Firms Provide Higher Quality than For-Profit Firms?

42 Pages Posted: 18 Feb 2011

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luigi Siciliani

University of York

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2011

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 quality price 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 under-provided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.

Keywords: Profit Constraints, Quality Competition, Semi-Altruistic Providers

JEL Classification: D21, D43, L13, L30

Suggested Citation

Brekke, Kurt Richard and Siciliani, Luigi and Straume, Odd Rune, Quality Competition with Profit Constraints: Do Non-Profit Firms Provide Higher Quality than For-Profit Firms? (February 7, 2011). NHH Department of Economics Discussion Paper No. 2/2011, Available at SSRN: https://ssrn.com/abstract=1762692 or http://dx.doi.org/10.2139/ssrn.1762692

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Luigi Siciliani

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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