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Abstract

We study the e¤ect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We o¤er a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. Our proposed mechanism can help explain several empirical …ndings of a negative e¤ect of competition on quality.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian School of Economics in its series Discussion Paper Series in Economics with number 9/2012.

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Length: 9 pages
Date of creation: 02 Apr 2012
Date of revision:
Handle: RePEc:hhs:nhheco:2012_009

Contact details of provider:
Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 959 277
Fax: 5595 9100
Email:
Web page: http://www.nhh.no/sam/
More information through EDIRC

Related research

Keywords: Quality and price competition; Motivated providers; Risk-averse providers.;

Other versions of this item:

Find related papers by JEL classification:

• D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
• D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
• L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
• L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-04-10 (All new papers)
• NEP-COM-2012-04-10 (Industrial Competition)

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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1. Chalkley, Martin & Malcomson, James M., 1998. "Contracting for health services when patient demand does not reflect quality," Journal of Health Economics, Elsevier, vol. 17(1), pages 1-19, January.
   
   • Chalkley, M. & Malcomson, J.M., 1995. "Contracting for health services when patient demand does not reflect quality," Discussion Paper Series In Economics And Econometrics 9514, Economics Division, School of Social Sciences, University of Southampton.
2. Ching-to Ma & James Burgess, 1993. "Quality competition, welfare, and regulation," Journal of Economics, Springer, vol. 58(2), pages 153-173, June.
   
   • Ching-to Albert Ma & James F. Burgess Jr., 1992. "Quality Competition, Welfare, and Regulation," Papers 0024, Boston University - Industry Studies Programme.
3. Carol Propper & Simon Burgess & Denise Gossage, 2008. "Competition and Quality: Evidence from the NHS Internal Market 1991-9," Economic Journal, Royal Economic Society, vol. 118(525), pages 138-170, 01.
   
   • Burgess, Simon & Gossage, Denise & Propper, Carol, 2003. "Competition and Quality: Evidence from the NHS Internal Market 1991-9," CEPR Discussion Papers 4026, C.E.P.R. Discussion Papers.
4. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers' Motivation in the Public Sector," Tinbergen Institute Discussion Papers 04-060/1, Tinbergen Institute.
5. Stefan Felder, 2009. "The variance of length of stay and the optimal DRG outlier payments," International Journal of Health Care Finance and Economics, Springer, vol. 9(3), pages 279-289, September.
6. Mougeot, Michel & Naegelen, Florence, 2008. "Supply-side risk adjustment and outlier payment policy," Journal of Health Economics, Elsevier, vol. 27(5), pages 1196-1200, September.
7. Martin Gaynor, 2006. "What Do We Know About Competition and Quality in Health Care Markets?," NBER Working Papers 12301, National Bureau of Economic Research, Inc.
   
   • Martin Gaynor, 2006. "What Do We know About Competition and Quality in Health Care Markets?," The Centre for Market and Public Organisation 06/151, Department of Economics, University of Bristol, UK.
   • Martin Gaynor, . "What Do We Know About Competition and Quality in Health Care Markets?," GSIA Working Papers 2006-E62, Carnegie Mellon University, Tepper School of Business.
8. Besley, Tim & Ghatak, Maitreesh, 2005. "Competition and incentives with motivated agents," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
   
   • Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
   • Besley, Timothy J. & Ghatak, Maitreesh, 2004. "Competition and Incentives with Motivated Agents," CEPR Discussion Papers 4641, C.E.P.R. Discussion Papers.
9. Hodgkin, Dominic & McGuire, Thomas G., 1994. "Payment levels and hospital response to prospective payment," Journal of Health Economics, Elsevier, vol. 13(1), pages 1-29, March.
10. Eggleston, Karen, 2005. "Multitasking and mixed systems for provider payment," Journal of Health Economics, Elsevier, vol. 24(1), pages 211-223, January.
11. David C. Grabowski, 2004. "A Longitudinal Study of Medicaid Payment, Private-Pay Price and Nursing Home Quality," International Journal of Health Care Finance and Economics, Springer, vol. 4(1), pages 5-26, 03.
12. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September.
    
    • Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999.
13. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
14. David Dranove & Mark A. Satterthwaite, 1992. "Monopolistic Competition When Price and Quality are Imperfectly Observable," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 518-534, Winter.
15. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
16. Propper, Carol & Burgess, Simon & Green, Katherine, 2004. "Does competition between hospitals improve the quality of care?: Hospital death rates and the NHS internal market," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1247-1272, July.
17. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March.
18. Jack, William, 2005. "Purchasing health care services from providers with unknown altruism," Journal of Health Economics, Elsevier, vol. 24(1), pages 73-93, January.
    
    • Billy Jack, 2001. "Purchasing Health Care Services from Providers with Unknown Altruism," Working Papers gueconwpa~03-03-13, Georgetown University, Department of Economics.
19. Miltiadis Makris, 2006. "Incentives for Motivated Agents under an Administrative Constraint," Discussion Papers 0601, Exeter University, Department of Economics.
    
    • Makris, Miltiadis, 2009. "Incentives for motivated agents under an administrative constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 428-440, August.
20. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
    
    • Josse Delfgaauw & Robert Dur, 2008. "Incentives and Workers' Motivation in the Public Sector," Economic Journal, Royal Economic Society, vol. 118(525), pages 171-191, 01.

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:

1. Market competition and product quality
   by Economic Logician in Economic Logic on 2012-04-18 13:15:00

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