Spatial competition for quality in the market for hospital care

Abstract

This study analyses the market for secondary health care services when patient choice depends on the quality/distance mix that achieves utility maximization. First, the hospital's equilibrium in a Hotelling spatial competition model under simultaneous quality choices is analyzed to define hospitals' strategic behavior. A first equilibrium outcome is provided, the understanding of which is extremely useful for the policy maker wishing to improve social welfare. Second, patients are assumed to be unable, because of asymmetry of information, to observe the true quality provided. Their decisions reflect the perceived quality, which is affected by bias. Using the mean-variance method, the equilibrium previously found is investigated in a stochastic framework.