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Quality provision in hospital markets with demand inertia:The role of patient expectations


  • Luís Sá

    () (NIPE and University of Minho)

  • Odd Rune Straume

    () (NIPE and Department of Economics, University of Minho and Department of Economics, University of Bergen)


The presence of switching costs and persistent patient preferences generates demand inertia and links current and future choices of hospital. Using a model of hospital competition with demand inertia, we investigate the effect of patient expectations (whether and how patients anticipate the future) on quality provision. We consider three types of expectations. Myopic patients choose a hospital based on current variables alone, forward-looking but naïve patients take the future into account but assume that quality remains constant, and forward-looking and rational patients foresee the evolution of quality. We rank equilibrium quality provision and show that it is higher under naïve than myopic expectations, while equilibrium quality under rational expectations may be highest or lowest. This result also holds for patient welfare, suggesting that rationality does not always benefit patients. We also show that only under rational expectations may quality be lower than in a market without inertia and switching cost reductions beneficial.

Suggested Citation

  • Luís Sá & Odd Rune Straume, 2020. "Quality provision in hospital markets with demand inertia:The role of patient expectations," NIPE Working Papers 03/2020, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:03/2020

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    References listed on IDEAS

    1. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark Cullen, 2015. "Moral Hazard in Health Insurance: Do Dynamic Incentives Matter?," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 725-741, October.
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    5. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2011. "Hospital Competition and Quality with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 444-469, June.
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    More about this item


    Hospital competition; myopic behaviour; forward-looking behaviour; rational expectations; switching costs.;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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