Thursday, January 25, 2018

Public Private Competition

Klumpp, Tilman (University of Alberta, Department of Economics) ; and Su, Xuejuan (University of Alberta, Department of Economics) explore Public Private Competition.

ABSTRACT: We examine competition between a private and a public provider in markets for "merit goods" such as education, healthcare, housing, recreation, or culture. The private firm provides a high-price/high-quality variety of the good and serves richer individuals, while the public firm provides a low-price/low-quality variety and serves poorer individuals. We derive the private competitor's best response to changes in the public firm's price and quality level. This enables us to examine the distributional effects of government policies aimed at making publicly provided goods more affordable or increase their quality, and of changes to the government budget constraint that make publicly provided goods more expensive or decrease their quality. Our results have implications for the financing of the public supply of such goods, and for whether additional resources, if available, should be spent on reducing the price or enhancing the quality of publicly provided goods.

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