The process of privatisation of health care has followed different patterns and some health care systems have preferred to create a mixed market where public organisations compete alongside private ones. The evidence on their performance is mixed. In this article we argue that public hospitals have different objectives than private ones, faces different constraints and are perceived differently from the patients. For this reason we model the market for hospital care as Salop circle with a centre where the public hospital is at the centre and private providers are along the circle. We show that, depending on the difference in the productivity advantage, mixed market may outperform both the benchmark (one public hospital at the centre) and private competition (N private providers competing along the circle).
Our model offers several policy implications: the process of privatisation may lead to cost reduction in the provision of health care, but it reduces the altruistic motivation of the staff. In health care this may lead to increased cost as concerns quality. The second important consideration relates to the perception that patients have of hospital pursuing different objectives, another aspect that should be taken into account in privatisation. Finally we show that in a mixed market it may be optimal to allow the public hospital to interpret its budget as soft; this mechanism may in fact allow to reduce the total health are bill.