WP-03-16

Entry Deterrence in Hospital Procedure Markets:
A Simple Model of Learning-by-Doing

Leemore Dafny

Abstract

This paper examines the strategic behavior of hospitals in one of their primary output markets: inpatient surgical procedures. High levels of learning-by-doing in surgical fields might act as a barrier to entry. Dafny investigates whether incumbent hospitals facing prospective entry in a procedure market manipulate their procedure volumes to produce such a barrier. She derives straightforward empirical tests from a model of patient demand, procedure quality, and differentiated product competition. Using hospital data on electrophysiological studies, an invasive cardiac procedure, she finds evidence of entry-deterring investment in procedure volume. These findings suggest that competitive motivations might play a role in treatment decisions.

Leemore Dafny, Kellogg School of Management and Institute for Policy Research, Northwestern University; and NBER

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