Spatial Competition for Quality in the Market for Hospital Care

The secondary health care market is studied through the Hotelling spatial competition model. Hospital and consumer behavior are jointly analyzed under the condition that a prospective diagnosis related group (DRG) payment system is implemented. The goal is to better understand the hospital’s strategic choices which are affected by the reimbursement scheme, patient behavior, and market structure. This contribution shows that the hospital monopolistic rent directly relates to patient behavior. The rent increases in distance disutility and decreases in patients’ quality perception. The monopolistic rent curbs, ceteris paribus, the provider’s incentives in producing quality. Because of the asymmetry of information that characterizes the health market, patients are generally unable to observe the true quality provided, and their decisions reflect a perceived quality, affected by bias. Using the mean-variance method, the equilibrium outcome is investigated in a stochastic framework.