Author(s): Brekke, Kurt R. ; Siciliani, Luigi ; Straume, Odd Rune
Date: 2011
Persistent ID: http://hdl.handle.net/1822/11996
Origin: RepositóriUM - Universidade do Minho
Subject(s): Profit constraints Semi-altruistic providers; Quality competition; Semi-altruistic providers
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 underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.
Fundação para a Ciência e a Tecnologia (FCT)
