Diffusing Innovations Under Market Competition: Evidence from Drug-Eluting Stents

This paper investigates how hospital competition and insurance reimbursement policy shape the diffusion of medical innovations. Using patient-level data from Taiwan's drug-eluting stent (DES) market in the Taipei metropolitan area, we estimate a structural model of hospital behavior, incorporating patient demand and hospitals' endogenous portfolio and pricing decisions. Our analysis reveals a fundamental trade-off: intense competition lowers prices but weakens hospitals' incentives to adopt new technologies, with total welfare peaking at an intermediate level of concentration. We then evaluate policy solutions. Selective contracting—where the government insurer negotiates exclusive wholesale discounts—can achieve a ``quadruple-win'' for consumers, hospitals, participating manufacturers, and the payer. In contrast, increasing the insurer's DES-specific reimbursement encourages hospitals to expand DES technology adoption and lower patient payment per DES, but creates a substantial fiscal burden for the insurer. Alternatively, a patient coupon program targeting low-income patients improves equity but has limited market-wide impact, as hospitals barely modify their price or portfolio decisions in response. These findings highlight that effective technology diffusion policies must account for downstream hospitals' strategic responses and their market competition.