Buyers - Sellers Network: Dynamic Interaction between Hospitals and HMOs

Our paper considers a dynamic interaction in a buyer-seller network. The network that we consider is a hospital-HMO network which forms a two-sided market in which the HMO is a platform which facilitates an interaction between consumers and hospitals. Hospitals have different locations and may have different qualities. Each period the hospitals submit bids (price for service) to the different HMOs. The bids are private information and each HMO observes only the bids that it gets. Given these bids the HMOs need to decide on the formation of its hospitals' network (which bids to accept) and on the premium consumers are asked to pay. A consumer that joins an HMO needs to pay the premium and then he may choose a hospital from the HMO network. Consumers are heterogeneous; they have different location and different preferences regarding the importance of hospitals' quality. The game is played over time. Hospitals invest every period in improving their quality and may change their bids every period. Consumers may switch between HMOs and hospitals depending on the premiums that are set, the HMOs' networks and the hospitals qualities. In such a setting we intend to study the effect of network formation on hospitals' qualities, the distribution of hospitals' qualities depending on hospitals' location and the distributions of consumers' type by location and preferences.