Public-Private Competition in Regulated Markets

We analyse the effect of competition on quality provision in mixed markets, such as health care and education, where public and private providers coexist. We make two key assumptions about the public provider in such markets, namely that it faces a regulated price and is (partly) motivated. We find that increased competition has an a priori ambiguous effect on quality provided by the public provider, while the scope for a quality reduction by the private provider is larger. We also derive the first-best solution and show how it coincides with the Nash equilibrium of a private (symmetric) duopoly.