Does Competition Improve Service Quality? The Case of Nursing Homes Where Public and Private Payers Coexist

Competition plays an ambiguous role in nursing home markets where public and private payers coexist. Using U.S. nursing home data with a wide range of market structures, we find a U-shaped relationship between competition and service quality when nursing homes serve a mix of public and private segments, and a monotonically increasing relationship when nursing homes mostly serve the public, price-regulated, segment. The outcomes can be explained by the interplay of two opposing effects of competition: the reputation building effect whereby competing firms choose high quality to build a good reputation and the rent extraction effect whereby competition hinders investment for quality improvements by eliminating price premia. These observations are consistent with a repeated game model that incorporates public and private payer segments.

Keywords: Competition, Mixed Payers, Reputation, Quality, Health Care

JEL Classification: I11, L1, D4

Suggested Citation: Suggested Citation

Lu, Susan Feng and Serfes, Konstantinos and Wedig, Gerard J. and Wu, Bingxiao, Does Competition Improve Service Quality? The Case of Nursing Homes Where Public and Private Payers Coexist (May 5, 2017). Available at SSRN: https://ssrn.com/abstract=2963566 or http://dx.doi.org/10.2139/ssrn.2963566