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

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  • Hugh Gravelle
  • Giuliano Masiero

Abstract

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.

Suggested Citation

  • Hugh Gravelle & Giuliano Masiero, "undated". "Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice," Discussion Papers 00/18, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:00/18
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2000/0018.pdf
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    References listed on IDEAS

    as
    1. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    2. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
    3. Asher Wolinsky, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 53-61.
    4. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
    5. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter.
    8. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
    9. Michael H. Riordan, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 265-279.
    10. 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.
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    More about this item

    Keywords

    Switching costs; Imperfect information; Quality; Product differentiation; Capitation; General Practice;

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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