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sensitive for first-stage services compared to follow-on services (Dranove
and Satterthwaite, 1992; Pauly, 1978). Moreover, consumers who want
to switch to a different provider in the second stage will face costs, e.g.
transaction costs for transferring medical records and search costs for
finding a new provider. This makes demand relatively less price sensitive
in the second stage compared to the first stage. In addition, switching costs
make new consumers valuable from the perspective of the seller, because
of their future purchases (Farrell and Klemperer, 2007; Klemperer, 1995).
These arguments all suggests that sellers on health care markets where
prices are market determined will compete in prices for first-stage
services, whereas price competition is less fierce for follow-on services.
This difference is exploited in the empirical strategy to identify the relative
effect of competition on prices for first-stage services relative to follow-on
services. The identification can be understood analogously to a difference-
in-differences framework. Prices for both kinds of services are effected by
competition, but the magnitude of the effects should, theoretically, differ
across services. Focusing on the difference between the effects across
services allows identification as the differencing controls for the unobserved
factors that are correlated with both competition and prices.
Another important contribution to the literature is that the data used in
this paper comes from administrative registers covering all dental care
consumed by adults in Sweden during the years 2008–2011. This is a
major improvement over the existing literature that mainly relies on
imperfect price measures and markets defined by geopolitical boarders that
do not necessarily delineate the actual market (Dranove and Satterthwaite,
2000). In Sweden, prices for dental care are set freely by providers as
opposed to negotiated by insurance plans (as in the US setting) or being
regulated. I use the actual price charged by the dentist for each service
rather than constructed price measures commonly used in the existing
literature. Furthermore, the data contains the coordinates of each clinic’s
location. Competition is defined as the number of clinics located within a
fixed distance from each clinic.
Finally, by exploiting auxiliary data on the pricing of services, I perform
policy relevant simulations to assess the absolute effects of competition
on prices. The simulations build on the assumption that prices for follow-on
services can be expressed as a function of prices for first-stage prices.
The assumption reflects that sellers are relatively more constrained by
competition in their price setting of first-stage services and therefore may
recoup foregone profits with high prices for the follow-on services.
The reduced form results show small but statistically significant effects of
competition on prices for first-stage services relative to follow-on services.
Competition is measured as the number of clinics within a fixed distance
from each clinic. The main results suggest that a 1% increase in the
number of clinics is followed by a 0.0089% decrease in prices for basic
examination and diagnostics relative to tooth extractions. The results
are robust across analyses of different kinds of services and model
specifications. The effects are small, but should be interpreted as short-
term effects of increased competition. Consequently, substantial effects
of competition on prices over time cannot be ruled out.
