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Chapter20
THE INDUSTRIAL ORGANIZATION OF HEALTH CARE
MARKETS*
DAVID DRANOVE and MARK A. SATTERTHWAITE
Kellogg GraduateSchool of Management, Northwestern University, Evanston, IL 60208
Contents
Abstract 1094
1. Introduction 1095
2. Agency and the physician-patient relationship 1098
3. Monopolistic competition in health care markets 1102
3.1. Demand under monopolistic competition 1104
3.2. Information and equilibrium price and quality 1107
4. Regime I: Independent physicians and hospital cost reimbursement 1111
4.1. Price competition among physicians 1112
4.2. Quality competition and the medical arms race 1114
5. Regime II: Hospital PPS and regulated physicians 1117
5.1. Quality choice under prospective payment 1118
5.2. Utilization review 1121
5.3. Dynamic cost-shifting 1123
6. Regime III: Managed care and contracted physicians 1125
6.1. Payer-driven competition 1126
6.2. Multinomial choice models
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