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Quality provision in hospital markets with demand inertia: The role of patient expectations


(2021) Journal of Health Economics , 80


As patients, the expectations we generate about our future healthcare needs influence our current choice of hospital. Demand faced by a given hospital thus depends on the patient expectations. And, in a context where hospitals compete to attract patients, the incentive to increase the quality of their services is stronger the more responsive to quality demand is.

Using a hospital competition model, the study demonstrates that demand responsiveness to quality is determined by the type of expectations that patients have and explores different possibilities for their behavior: myopic patients choose a hospital based only on current variables and ignore the future; naive patients consider the future, but under the wrong assumption that quality increases are permanent; and rational patients correctly predict the evolution of quality.

Owing to their incorrect belief, demand from naive patients is more responsive to quality than that from the myopic, thereby eliciting higher quality provision. Differently, when patients are rational, the actual relationship between present and future quality plays a role because patients are aware of it. If higher quality in the present foreshadows lower (sufficiently higher) quality in the future, then demand responsiveness is lowest (highest). This induces hospitals to provide a quality level that ranges accordingly from lowest to highest of the three. For patients, ignorance is occasionally bliss.