Quality Choice and Market Structure: A Dynamic Analysis of Nursing Home Oligopolies

Abstract

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. Sunken entry costs are extremely large, and quality adjustment behavior is governed by significant fixed adjustment costs. The model is used to examine how a change in the economic environment affects nursing homes' quality decisions. It predicts that the overall quality of care deteriorates given an increase in the elderly population. A proposal to eliminate low-quality nursing homes is found to cause a large supply-side shortage. Another proposal to lower entry costs has offered a perverse incentive to provide low quality of care.

Keywords: dynamic model, entry, exit, quality decisions