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Entry and Firm Location in Mixed Industries: Examining the Impact of Ownership Type on Entry Decisions in Long-Term Care (WP-02-35)

Jeffrey P. Ballou

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, Department of Economics,  Northwestern University

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