Does Competition Improve Service Quality? The Case of Nursing Homes Where Public and Private Payers Coexist
70 Pages Posted: 6 May 2017 Last revised: 1 Jun 2020
Date Written: May 5, 2017
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
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