Competition, Equity and Quality in Public Services

This paper examines the implications of consumer heterogeneity for the choice of competition and monopoly in public services delivery. In a setting with motivated providers who favour one type of service user over another, we show that competition can raise average quality. However, this may be at the expense of the minority type of user if the providers favour the majority type. Then an inequity averse regulator may protect the minority by not introducing competition. Alternatively, if the providers favour the minority type, the regulator may introduce competition to incentivize the providers to pay attention to the less rewarding majority type.