Measuring Quality Effects in Equilibrium

Unlike demand studies in other industries, models of provider demand in health care often must omit a price or any other factor that equilibrates the market. Estimates of the consumer response to quality may consequently be attenuated, if the limited capacity of individual providers prevents some consumers from obtaining higher quality. We propose a tractable method to address this problem by adding a congestion effect to standard discrete-choice models. We show analytically how this improves forecasts of the consumer response to quality. We then apply this method to the market for heart surgery, and find that the attenuation bias in estimated quality effects can be important empirically.