Quality Choice and Market Structure: A Dynamic Analysis of Nursing Home Oligopolies
Indiana University - Kelley School of Business - Department of Business Economics & Public Policy
April 17, 2012
This paper develops a dynamic model of entry and exit to analyze quality choice and oligopoly market structure in the nursing home industry. The model is estimated using a hybrid two-step estimator. I find significant heterogeneity in the competitive effects across market structures: firms of similar quality levels compete more strongly than dissimilar firms. Sunk entry costs are extremely large, and quality adjustment behavior is governed by significant fixed adjustment costs. I use the model to examine how a change in the economic environment affects nursing homes' quality choice. The model predicts that the overall quality of care deteriorates given an increase in the elderly population. A proposal to eliminate low-quality nursing homes has caused a large supply-side shortage. Another proposal to lower entry costs has offered a perverse incentive to provide low quality of care as competition narrows the gap in pay rates between private-pay and Medicaid patients.
Number of Pages in PDF File: 49working papers series
Date posted: April 18, 2012
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