Does Competition Improve Service Quality? The Case of Nursing Homes Where Public and Private Payers Coexist

Abstract：

Competition plays an ambiguous role in markets for credence goods, where public and private payers coexist. Using nursing home data with a wide range of market structures, we find a U-shaped relationship between competition and service quality when nursing homes serve a mix of private and public segments, and a monotonic relationship when providers only serve the public segment. The outcomes can be explained by the interplay of two opposing effects of competition: the reputation building effect whereby competing firms choose high quality to build a good reputation and the rent extraction effect whereby competition hinders investment for quality improvements by eliminating price premia. These observations are consistent with a repeated game model that incorporates public and private payer segments. Overall, our U-shaped finding suggests that antitrust policy should consider a “rule of reason” to guide mergers in markets with endogenous quality.

Speaker Biography：

KONSTANTINOS SERFES is a Professor of Economics at the LeBow College of Business at Drexel University.His research interests lie in the areas of industrial organization, microeconomics and applied game theory.In particular, his current research employs game-theoretic models to examine issues related with price discrimination, the effects of competition on various firm strategies (such as quality provision, price dispersion, firm boundaries, contract design and innovation), regulation and patent licensing.His work has appeared in academic journals such as the Economic Theory, the European Economic Review, the International Journal of Industrial Organization, the Journal of Development Economics, the Journal of Industrial Economics, the Journal of Economics & Management Strategy and the Review of Economics and Statistics.He holds a Ph.D. in Economics and a M.S. in Mathematics from the University of Illinois at Champaign-Urbana and a B.A. and a M.A. in Economics from the Athens University of Economics and Business.He holds visiting positions at the Federal Reserve Bank of Philadelphia and the American College of Greece-ALBA.