Quality Competition with Profit Constraints: Do Non-Profit Firms Provide Higher Quality than For-Profit Firms?
42 Pages Posted: 18 Feb 2011
Date Written: February 7, 2011
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
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