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Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice

  • Gravelle, Hugh
  • Masiero, Giuliano

We model a system akin to the British National Health Service in which general practictioners (GPs) are paid from general taxation. GPs are horizontally and vertically differentiated and compete via their imperfect observed quality. We focus on the way in which patient uncertainty and switching costs interact and the implications for GP's choice of quality. We show that for any given capitation fee quality is lower and the incentive effects of the fee on quality are smaller. There are diminishing welfare gains from improving consumers information but increasing welfare gains from reducing switching costs. GPs do not act efficiently to improve consumer information via advertising or to reduce the costs of switching.

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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 19 (2000)
Issue (Month): 6 (November)
Pages: 1067-1088

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Handle: RePEc:eee:jhecon:v:19:y:2000:i:6:p:1067-1088
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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  1. Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter.
  2. Wolinsky, Asher, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 53-61, January.
  3. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  4. Schmalensee, Richard., 1980. "Product differentiation advantages of pioneering brands," Working papers 1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  6. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  7. Economides, Nicholas, 1993. "Quality variations in the circular model of variety-differentiated products," Regional Science and Urban Economics, Elsevier, vol. 23(2), pages 235-257, April.
  8. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
  9. Riordan, Michael H, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 265-79, May.
  10. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
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