Regulation and Capacity Competition in Health Care: Evidence from Dialysis Markets

This paper studies entry and capacity decisions by dialysis providers in the U.S. We estimate a structural model where providers make strategic continuous choices of capacities based on private information about own costs and beliefs about competitors’ behaviors. We evaluate the impact on market structure and provider profits under counterfactual regulatory policies that increase per capacity cost or reduce per capacity payment. We find that these policies reduce the market capacity of dialysis stations. However, the downward sloping reaction curve shields some providers from negative profit shocks in certain markets. The paper also has a methodological contribution in that it proposes new estimators for Bayesian games with continuous actions, which differ qualitative from discrete Bayesian games such as those with binary entry decisions.

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