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Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market

Author

Listed:
  • Ken Onishi

    (School of Economics, Singapore Management University)

  • Naoki Wakamori

    (Faculty of Economics, The University of Tokyo)

  • Chiyo Hashimoto

    (Center for Health Policy/Center for Primary Care and Outcomes Research, Stanford University)

  • Shun-ichiro Bessho

    (Faculty of Economics, Keio University)

Abstract

This paper quantifies the welfare consequences of the medical arms race in the context of MRI adoption. We build and estimate a model of the vertical structure of the industry where MRI manufacturers sell high- and low-quality MRIs in the up- stream market, whereas medical institutions provide medical services to patients in the downstream market. Simulation results suggest that the current free-entry policy in Japan leads to excess MRI adoption. Furthermore, regulating medical institutions' MRI adoption, taxing MRI purchases, or softening competition among MRI manufacturers would increase social welfare substantially by mitigating the business-stealing effect in the downstream market.

Suggested Citation

  • Ken Onishi & Naoki Wakamori & Chiyo Hashimoto & Shun-ichiro Bessho, 2016. "Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market," CIRJE F-Series CIRJE-F-1001, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2016cf1001
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2016/2016cf1001.pdf
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    References listed on IDEAS

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    5. Shiko Maruyama, 2011. "SOCIALLY OPTIMAL SUBSIDIES FOR ENTRY: THE CASE OF MEDICARE PAYMENTS TO HMOs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 105-129, February.
    6. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    7. Arghya Ghosh & Hodaka Morita, 2007. "Free entry and social efficiency under vertical oligopoly," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 541-554, June.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    10. Panle Jia Barwick & Parag A. Pathak, 2015. "The costs of free entry: an empirical study of real estate agents in Greater Boston," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 103-145, March.
    11. Baker, Laurence C., 2001. "Managed care and technology adoption in health care: evidence from magnetic resonance imaging," Journal of Health Economics, Elsevier, vol. 20(3), pages 395-421, May.
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