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

See all articles by Susan F. Lu

Susan F. Lu

Purdue University - Krannert School of Management

Konstantinos Serfes

Drexel University

Gerard J. Wedig

University of Rochester - Simon Business School

Bingxiao Wu

Rutgers University

Date Written: May 5, 2017

Abstract

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

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

Susan Feng Lu

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://https://sites.google.com/site/susanluhome/home

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

Gerard J. Wedig

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Bingxiao Wu

Rutgers University ( email )

75 Hamilton St
New Brunswick, NJ 08901
United States
8479120795 (Phone)

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