Wednesday, January 20, 2016

Quality and Competition between Public and Private Firms

Liisa Laine (Boston University and Dand School of Business and Economics, University of Jyvaskyla) and Ching-To Albert Ma (Boston University) study Quality and Competition between Public and Private Firms.

ABSTRACT:  We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have different quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame perfect equilibria for general consumer valuation distributions and quality cost functions, and provide conditions for first-best equilibrium qualities. Various policy implications are drawn.

https://lawprofessors.typepad.com/antitrustprof_blog/2016/01/quality-and-competition-between-public-and-private-firms.html

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