Nonprofit and For-Profit Competition with Public Alternatives in an Urban Setting with Congestion

Abstract

This theoretical analysis describes nonprofit-public and for-profit-public competition in an urban setting. The model resembles a Hotelling game with endogenous firm location, prices, and facility congestion. Because residents have free mobility, rent is also endogenous. The analysis identifies the optimal spatial and pricing configuration, against which nonprofit-public and for-profit-public competition are compared. If there is no congestion, both types of public-private competition are equivalent if profits are ignored. Neither type of public-private competition is optimal. However when congestion is present, nonprofit-public competition improves overall welfare in comparison to for-profit-public competition. The analysis identifies optimal subsidies and zoning rules that induce welfare-improving behavior on the part of either type of competition.