Working Paper: CEPR ID: DP8284
Authors: Kurt Richard Brekke; Luigi Siciliani; Odd Rune Straume
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 underprovided. 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; semialtruistic providers
JEL Codes: D21; D43; L13; L30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| profit constraints (D22) | lower cost efficiency (D61) |
| profit constraints (D22) | quality (L15) |
| profit constraints (D22) | price (D41) |
| high altruism (D64) | higher quality for profit-constrained firms (L15) |
| high altruism (D64) | lower prices for profit-constrained firms (D22) |
| low altruism (D64) | lower quality for profit-constrained firms (L15) |
| low altruism (D64) | higher prices for profit-constrained firms (D22) |
| profit constraints (D22) | welfare (I38) |