“Quality and Competition between Public and Private Firms” by Professor Albert Ma
Professor Albert Ma
Professor of Economics
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. Consumers' quality valuations follow a general distribution. Firms' unit production cost is an increasing and convex function of quality. There may be 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, and provide conditions on consumer valuation distribution for first‐best equilibrium qualities. Various policy implications are drawn.