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

Susan Feng Lu (), Konstantinos Serfes (), Gerard Wedig () and Bingxiao Wu ()
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Susan Feng Lu: Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
Konstantinos Serfes: School of Economics, LeBow College of Business, Drexel University, Philadelphia, Pennsylvania 19104
Gerard Wedig: Simon Business School, University of Rochester, Rochester, New York 14627
Bingxiao Wu: Department of Economics, Rutgers University, New Brunswick, New Jersey 08901

Management Science, 2021, vol. 67, issue 10, 6493-6512

Abstract: Competition plays an ambiguous role in nursing home markets where public and private payers coexist. Using U.S. 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 public and private segments, and a monotonically increasing relationship when nursing homes mostly serve the public, price-regulated, 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 lowering price premia. These observations are consistent with a repeated game model that incorporates public and private-payer segments.

Keywords: competition; service quality; mixed payers; rent extraction; reputation building; nursing homes; Medicare; Medicaid (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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