Quality and Welfare in a Mixed Duopoly with Regulated Prices: The Case of a Public and a Private Hospital

Abstract Hospital markets are often characterized by price regulation and the existence of different ownership types. Using a Hotelling framework, this paper analyses the effect of heterogeneous objectives of hospitals on quality differentiation, profits and overall welfare in a price-regulated duopoly with exogenous symmetric locations. In contrast to other studies on mixed duopolies, this paper shows that, in this framework, privatization of the public hospital may increase overall welfare. This holds if the public hospital is similar to the private hospital or less efficient and competition is low. The main driving force is the single-regulated price which induces under-provision (over-provision) of quality of the more (less) efficient hospital compared with the first best. However, if the public hospital is sufficiently more efficient and competition is fierce, a mixed duopoly outperforms both a private and a public duopoly due to an equilibrium price below (above) the price of the private ( public) duopoly. This medium price discourages over-provision of quality of the less efficient hospital and - together with the non-profit objective - encourages an increase in quality of the more efficient public hospital.