Impact of price regulation and market intervention in health care market competition with semi-altruistic providers

Abstract

it must be set as low as possible when the quality improvement cost of hospitals or the traveling cost of patients are both sufficiently large, and reversely, as high as possible when either one of such costs is sufficiently small. Lastly, we show that a regulator can provide subsidy to further improve the patients' surplus and that which party it should subsidize depends on the cost structure of the market.

This paper studies the impact of price regulation on the health care market under competition when hospitals show semi-altruistic behavior. Applying Hotelling's model, we examine a competition between two hospitals where they compete with quality and price to maximize their objectives, their own profits and patients' benefits. Using the model, we examine the hospitals' optimal choices on the price and quality of services in two different cases: under the presence or absence of price regulation. By comparing the optimal decisions of hospitals, we show that the presence of price regulation leads to better service quality when the marginal revenue at the equilibrium is sufficiently large or when hospitals show a high degree of altruism. Given the positive role of price regulation, we further examine the optimal regulation price from the perspective of a regulator. When the regulator's goal is to maximize the total patients' surplus, we show that the optimal regulation price is bi-directional