Hotelling Competition on Quality in the Health Care Market Marcello Montefiori

“Health” is both horizontally and vertically differentiated. Payment is financed by tax. Analysis is done on a standard Hotelling line. Hospitals can choose only quality The author finds Cournot and Stackleberg equilibria and then compares them He analyzes a dynamic extension of the Stackleberg equilibrium. He also introduces uncertainty into the model. The Stackleberg Equilibrium

The Consumer Utility Function

The Hospital’s Behavior

The Cournot Equilibrium

The Stackleberg Equilibrium

Comparison Between Cournot and Stackleberg

The equilibrium outcome is not dynamically stable. When the leader moves again, he will react to the follower’s quality. They will keep reacting to each other and if the game goes on for long enough, their qualities converge. In the long run it reaches the same equilibrium at Cournot. Extending the Stackleberg Equilibrium

Uncertainty

We can see that even if both hospitals provide the same quality, we can they may attain different profits. This is because people prefer less variance for the same mean. In the case of Stackleberg, a miniscule incremental increase in quality s is not sufficient from the firm that is reacting. This leads to a faster convergence to Cournot than in the deterministic case. Thus, hospitals always have an incentive to reduce variance. Uncertainty

Relates the previous literature of horizontal and vertical differentiation to a real world example. It eliminates price from the model, and allows us to focus only on quality. Most of the results are intuitive. The Stackleberg result is counter intuitive but the explanation is solid The idea of a dynamic Stackleberg game makes a lot of sense. Convergence makes the analysis all the more interesting. The author talks about consumer uncertainty, which is something he had not discussed yet. Strengths

Functional form is too specific. The assumption that the hospitals are already maximally differentiated in terms of location is very strong. Demand is uniform (again). Transaction costs do not depend on direction and are affect the consumer linearly. Weaknesses