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

Author

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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)

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.

Suggested Citation

  • Susan Feng Lu & Konstantinos Serfes & Gerard Wedig & Bingxiao Wu, 2021. "Does Competition Improve Service Quality? The Case of Nursing Homes Where Public and Private Payers Coexist," Management Science, INFORMS, vol. 67(10), pages 6493-6512, October.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:10:p:6493-6512
    DOI: 10.1287/mnsc.2020.3806
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