Market Equilibria With Not-For-Profit Firms

Abstract

This paper provides a comprehensive framework to analyze the supply of medical care in a market structure common in the United States. The framework has three novel features: First, it portrays equilibrium quantity, quality, and price in not-for-profit hospital markets, both under conditions of free entry and with regulatory constraints on entry. Second, it shows that many phenomena, commonly attributed to demand inducement and/or explained by "target income" models of physicians' behavior, emerge directly from a standard monopolistic competition model, constrained only by the assumption that consumer search is limited. Third, we link explicitly hospital and physician behavior, showing how each affects the other's cost functions and demand curves. Throughout the paper we provide some stylized evidence to demonstrate the usefulness of our model