This paper examines the impact of competition on the quality of public services and explores how competition can be set in ways that enhance service quality. The analysis draws on the UK’s ‘internal market’ from 1992 to 1996, where competition was introduced to improve efficiency and quality but was found to have a negative impact on clinical outcomes, such as increased mortality rates for Acute Myocardial Infarction (AMI). By evaluating the empirical findings of various studies, we argue that when competition shifts the focus toward price sensitivity rather than quality, it undermines service standards. Through a theoretical framework based on payer-driven competition, we demonstrate that when competition is primarily price-based, providers respond to price pressures by reducing quality. However, when demand becomes more elastic to quality than to price—as seen in later UK healthcare reforms (2001–2008) and evidence from Norway—competition incentivizes providers to enhance quality. Our findings suggest that well-designed competitive systems, where consumer choices prioritize quality, can effectively drive service providers to compete on quality dimensions, ultimately leading to higher overall standards.
X.‐Y. Li (Tue,) studied this question.