Competition And Coordination In Two-tier Public Service Systems

Public services such as healthcare are typically constrained by government budgets. Because public service capacity frequently has not been able to keep up with the growth in demand for such services, expected wait times for certain public services have increased significantly. The Canadian healthcare system, which is referred to as a "single-tier free service system," is completely funded by the provincial governments. Lengthy wait times for certain elective surgeries, such as knee or hip replacements, have become a serious social problem in several Canadian provinces. A possible solution to the lengthy wait times is to allow private hospitals to offer the same service on a fee basis to reduce the burden on public hospitals. In Chinese Hong Kong, the healthcare system consists of both public hospital (i.e. the free system) and private hospital (i.e. the toll system), which is referred to as a "two-tier service system." For certain non-emergency medical conditions, patients have two options:obtaining the free service in a public hospital typically after a lengthy wait or paying for faster service in a private hospital. There are a variety of two-tier healthcare systems, such as those in the United States, the United Kingdom, Australia, Singapore, and many European countries. Similar two-tier service systems can also be found in other public services, such as the toll lanes and free lanes in urban highway systems.The advantages of the private system such as higher service quality and shorter wait times are typically the reason for introducing a two-tier system into a public service sector. However, an important issue for a two-tier public service system is that there exists incongruence between the government’s social welfare goal and private firms’profit maximum goal. The Aravind Eye Hospital in India has both free and toll hospitals to treat blindness, and the profits generated from the pay hospital are used to operate the free hospital. This motivates us to study the coordination merchanism that the government subsidizes the free system by using tax collected from the toll system. To alleviate the overcrowding problem in the public hospitals, Australian government offers a subsidy to the customers choosing private hospitals to reduce the service demand for the public hospitals. That motivates us to discuss another way of coordinating two-tier system which cuts some free system budget to subsidize the toll system customers. Recently, the long waiting time in public hospitals and the high price in private hospital have become serious issues in healthcare systems. For example, patients with non-life threatening and persistent pain often need to wait more than 6 months from referral to access treatment in Australian public hospitals or pay an expensive price to access treatment in private hospitals with short waiting time. Therefore, investigating how price competition among private SPs affects customer service and social welfare in two-tier service system is practically meaningful.For the above first and second questions, this paper uses mixed duopoly game model to study the competion issue between the free system and toll system and the government coordination issue with customers who are sensitive to both service quality and delay. For the above third question, this paper uses price duopoly game model to study the price competion issue between two private service providers when a public free service provider exists in the market. The main results and contributions of this paper as follows:(1) Analysis of two-tier public service systems under government tax coordination policy. The free system attempts to maximize its expected total customer utility with limited capacity, whereas the toll system attempts to maximize its profit. To achieve the social welfare goal, the government subsidizes the free system by using tax collected from the toll system. We establish Nash equilibrium strategies and identify the conditions for the existence of the two-tier service system. We employ several interesting and counter-intuitive managerial insights generated by the model to show that the public service can be delivered more efficiently via customer choice and service provider competition. In addition, we show that a relatively low tax-subsidy rate can almost perfectly coordinate the two service providers to achieve most of the maximum possible benefit of the two-tier service system.(2) Analysis of two-tier public service systems under a government subsidy policy. To reduce the congestion in the free system, the government may encourage customers to use the pay system by offering them a subsidy. Two scenarios with unregulated and regulated prices are considered. When the pay system price is unregulated(the private SP can set prices freely), we find that if customers are less sensitive to the service delay, the subsidy policy can effectively reduce the expected waiting time for the free system and increase the customer utility surplus of the entire two-tier system. However, if customers are more sensitive to the service delay, the subsidy policy may have the opposite effect. When the pay system price is regulated (the price determined by government), the subsidy policy can effectively reduce the expected waiting time for the free system and improve the social welfare of the two-tier system. And there exists an optimal regulated price to maximize the social welfare of the entire public service system.(3) Analysis of price competition in two-tier service systems. This paper focuses on the issue of price competition of two private service providers (SPs) in a market with a free public SP. The two private SPs, differentiated by service quality and capacity, choose the optimal prices to maximize their own profits. It has been shown that such a price competition between the private SPs in a market with a public SP reaches a pure Nash equilibrium. We investigate the impact on the social welfare of the two-tier service system of the competition and collaboration between the two private SPs. In addition, we also examine the impact of the public SP’s competitive advantage on customer service and the private SP’s pricing strategies and their performance. Numerical examples are presented to generate managerial insights for practitioners.Finally, in addtion to the above achivements in two-tier service system, the thesis discusses some challenging topics which deserve further research in future. The operation management research in public service such as healthcare has become an internationally hot topic. The resarch results of this paper can provide important managerial insights for policy makers and firms’managers, and also provide solid basis for further studying two-tier public service system.