29(40)
7
Conclusion
Markets today play an important role in the provision of health care
services throughout the developed world. There is therefore a growing
literature on the industrial organization of health care markets. A large
part of the literature is focused on the effects of competition on prices.
However, much of the existing empirical literature fails to credibly identify
the effect. This paper suggests a framework to identify the effect of
competition on prices in a setting where price setting is free and
competition is patient-driven, namely the Swedish market for dental care.
The rationale for the identification strategy comes from the theoretical
literature on competition in health care and switching costs. The strategy
exploits that the effect of competition differs across services; price
competition is more intense for services such as examinations and
diagnostics (first-stage services), compared to more complicated and
unusual services (follow-on services). This is because patients are relatively
better informed about first-stage services and face costs for switching
once they have chosen a provider. Consequently, consumers’ demand
is relatively less price sensitive to follow-on services and therefore
competition has heterogeneous effects across services. By exploiting this
difference in the effect of competition on prices, I identify a relative effect
of competition.
The results show small, but statistically significant negative effects of
competition on the price difference between first-stage services and follow-
on services. Competition is measured as the number of clinics within a fixed
distance from each clinic. A 1% increase in competition is followed by an
increase in the price difference in the range -0.0089% to -0.017%. This
implies that one more clinic within a radius of one kilometer lowers prices
for first-stage services relative to follow-on services with up to 0.1%. The
results are robust for different kinds of model specifications and across
analyses of different kinds of services.
In order to assess the policy relevant
absolute
effect of competition on
prices I add the assumption that prices for follow-on services can be
expressed as a function of the average effect on first-stage prices. This
reflects that sellers recoup foregone profits from low prices for first-stage
services with high prices for follow-on services. By exploiting auxiliary data
on the pricing of services, the model assumptions allow me to perform
simulations to assess the absolute effects.
The simulation results suggest that the absolute effect of competition on
prices is negative for both kinds of services. This implies that even though
the magnitude of the effect on prices indeed differs across services,
competition increases welfare for consumers. A 1% increase in competition
is followed by a decrease in the price for first-stage services in the range
0.02% to 0.09%. Relating this to the number of times the first-stage
