When standard profit maximizers and alternative
firm types — such as nonprofits, government organizations,
or cooperatives — compete in the same industry, their coexistence
may be explained either by a lack of meaningful distinctions in
outputs across types, or by systematic product differentiation
between the two types coupled with a cost advantage for alternative
types. This study develops the implications of each of these explanations
of the mixed industry for observable patterns of firm entry and
tests competing explanations of coexistence. It argues that the
relevant test of whether alternative types should receive the
preferential government treatment that is often accorded to them
turns on whether these types produce outputs that are socially
valuable but unprofitable for standard profit maximizers to produce.
In the empirical section, I use data from rural markets in the
United States to examine whether nonprofit nursing facilities
enter markets that for-profit firms cannot profitably enter, thereby
expanding access to nursing care to populations that would not
otherwise be served. This study also addresses the broader, related
question of the ways in which the markets that nonprofit firms
enter differ from those that for-profit firms enter. The results
of the models show that nonprofit firms typically do not enter
markets that differ from markets entered by for-profits. Consistent
with prediction, however, government nursing homes are more likely
to enter markets that are unprofitable, as characterized by their
relatively low populations. Based on patterns of entry, this study
does not find evidence of a clear cost advantage for nonprofits
over for-profits, despite the tax advantages conferred upon nonprofit
firms.
Jeffrey P. Ballou,
Research Assistant Professor, Institute for Policy Research,
Northwestern University
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