Optimal Funding Strategy and Quality Competition in a Mixed Oligopoly

Abstract

We study the optimal strategy of a public funding scheme in a mixed oligopoly market with one welfare-maximizing public provider and two heterogeneous private providers with distinguishing marginal costs, where all providers compete on quality and where providers included in the funding scheme gain quantity compensation. We find that the first-order optimal solution can only be implemented when the private providers are included in the funding scheme. However, an increase in the private providers' homogeneous quantity compensation has no effect on the quality gap or price gap between the two private providers, while the increase in the heterogeneous one will impact both the quality and price gap.