Public and Private Competition over Quality

We study a two stage, quality-then-price, game between the public sector and private firms with horizontal and vertical differentiation. We consider both for-profit and non-for-profit private firms. There are private firms that receives subsidies and charge prices and  public providers. In the first-stage qualities are simultaneously chosen and then prices are chosen in the same manner. Households’quality valuations are drawn from log-concave distributions.  We derive several interesting results: i) payments falls with the quality of the good in the public sector and households’ valuation of it; (ii) for-profit firms provide higher quality than non-for-profit firms when government budget is small; (iii) the quality of privately provided goods increases with the quality of publicly provided goods. Subsidies to private firms may increase or decrease equilibrium quality.