3(40)
Abstract
This paper studies the effect of competition on prices on a health care
market where prices are market determined; the Swedish market for dental
care. The paper adds to the literature by addressing the empirical challenge
of identifying the effect of competition on prices. The empirical strategy
exploits that the effect of competition differs across services, depending on
the characteristics of the service. Price competition is theoretically more
intense for services such as examinations and diagnostics (first-stage
services), compared to more complicated and unusual treatments (follow-
on services). This is because consumers are better informed and thus
more price sensitive with respect to first-stage services and face costs for
switching once they have chosen a provider. By exploiting this difference, I
identify a relative effect of competition on prices. The results suggest small
but statistically significant negative effects on prices for first-stage services
relative to follow-on services. A 1% increase in competition from one year
to the next is followed by an increase in the price difference in the range
0.0089% to 0.017%. These are short-term effects and provide evidence
of strategic behavior of clinics. Hence, substantial effects of competition on
prices over time cannot be ruled out. Policy simulations suggest that the
absolute effect of competition on prices is in the range -0.01% to -0.09%.
Thus, the policy simulations suggest that there is room for price decreases
in the Swedish market for dental care and that increased competition would
be welfare enhancing.
Keywords
: Competition, Firm Behavior, Pricing, Switching Costs,
Asymmetric Information, Health Care, Dental Care.
