Odd Rune Straume

Hospital Competition and Quality with Regulated Prices

We analyse the effect of competition on quality in hospital markets with regulated prices, considering both the effect of (i) introducing competition (monopoly versus competition) and (ii) increasing competition through lower transportation costs (increased substitutability) or a higher number of hospitals. With semi-altruistic providers and a fairly general cost structure, we show that the relationship between competition and quality is generally ambiguous. In contrast to the received theoretical literature, this is consistent with, and potentially explains, the mixed empirical evidence.

Downstream merger with upstream market power

We examine how a downstream merger a2ects input prices and, in turn, the pro3tability of a such a merger under Cournot competition with di2erentiated products. Input suppliers can be interpreted as ordinary upstream 3rms, or trade unions organising workers. If the input suppliers are plant-speci3c, we 3nd that a merger is more pro3table than in a corresponding model with exogenous input prices. In contrast to the received literature, we 3nd that it can be more profitable to take part in a merger than being an outsider. For 3rm-speci3c input suppliers, on the other hand, results are reversed. We apply our model to endogenous merger formation in an international oligopoly, and show that the equilibrium market structure is likely to be characterised by cross-border merger. c

Quality and location choices under price regulation

In a model of spatial competition, we analyze the equilibrium outcomes in markets where the product price is exogenous. Using an extended version of the Hotelling model, we assume that firms choose their locations and the quality of the product they supply. We derive the optimal price set by a welfarist regulator. If the regulator can commit to a price prior to the choice of locations, the optimal (second-best) price causes overinvestment in quality and an insufficient degree of horizontal differentiation (compared with the first-best solution) if the transportation cost of consumers is sufficiently high. Under partial commitment, where the regulator is not able to commit prior to location choices, the optimal price induces first-best quality, but horizontal differentiation is inefficiently high.

Employment Protection Versus Flexicurity: On Technology Adoption in Unionised Firms

We analyse how different labour market institutions--employment protection versus ‘flexicurity’--affect technology adoption in unionised firms. We consider trade unions’ incentives to oppose or endorse labour-saving technology and firms’ incentives to invest in such technology. Increased flexicurity--interpreted as less employment protection and a higher reservation wage for workers--unambiguously increases firms’ incentives for technology adoption. If unions have some direct influence on technology, a higher reservation wage also makes unions more willing to accept technological change. Less employment protection has the opposite effect, since this increases the downside (job losses) of labour-saving technology.

Quality Competition with Profit Constraints: Do Non-Profit Firms Provide Higher Quality than For-Profit Firms?

In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and quality-price competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.

Competition and quality in regulated markets: a differential-game approach

We investigate the effect of competition on quality in health care markets with regulated prices taking a differential game approach, in which quality is a stock variable. Using a Hotelling framework, we derive the open-loop solution (health care providers set the optimal investment plan at the initial period) and the feedback closed-loop solution (providers move investments in response to the dynamics of the states). Under the closed-loop solution competition is more intense in the sense that providers observe quality in each period and base their investment on this information. If the marginal provision cost is constant, the open-loop and closed-loop solutions coincide, and the results are similar to the ones obtained by static models. If the marginal provision cost is increasing, investment and quality are lower in the closed-loop solution (when competition is more intense). In this case, static models tend to exaggerate the positive effect of competition on quality.

Globalization, product differentiation, and wage inequality

This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants.

Hospital Competition with Soft Budgets

We study the incentives for hospitals to provide quality and expend cost-reducing effort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving.

Horizontal Mergers and Product Quality

Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.

Hospital Mergers with Regulated Prices

We study the effects of a hospital merger using a spatial competition framework with semialtruistic hospitals that invest in quality and expend cost-containment effort facing regulated prices. We find that the merging hospitals always reduce quality, whereas non-merging hospitals respond by increasing (reducing) quality if qualities are strategic substitutes (complements). A merger leads to higher average treatment cost efficiency and, if qualities are strategic substitutes, might also increase average quality in the market. If a merger leads to hospital closure, the resulting effect on quality is positive (negative) for all hospitals in the market if qualities are strategic substitutes (complements). Whether qualities are strategic substitutes or complements depends on the degree of altruism, the effectiveness of cost-containment effort, and the degree of cost substitutability between quality and treatment volume.