Unrestricted Entry and Nonprice Competition: The Case of Technological Adoption in Hospitals

Abstract

Medical technology adoption is a major contributor to rising health care expenditures in the US. Multiple market failures provide incentives for hospitals to adopt technologies. Unrestricted entry may result in excess capacity and reductions in output that are inefficient with respect to cost and quality. We analyze the effects of hospital entry in the market for coronary artery bypass graft surgery on the number of procedures performed at both the market and firm levels, using California data from 1983 to 1990. We test the hypothesis that entry has differential effects on hospital output in a market with nonprice competition, depending on market structure. Results show that as the proximity of the nearest competitor increases with entry, hospital output declines. Holding distance to the nearest competitor constant, increasing the number of competitors results in a smaller, but still significant, decrease in output. When there are few incumbents nearby, however, output does not change significantly with entry, suggesting "business-augmenting" effects that result in increased physician referrals offset much of the conventional "businessstealing" effects.