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

Abstract

The presence of switching costs and persistent patient preferences generates demand inertia and links current and future choices of hospital. Using a model of hospital competition with demand inertia, we investigate the effect of patient expectations (whether and how patients anticipate the future) on quality provision. We consider three types of expectations. Myopic patients choose a hospital based on current variables alone, forward-looking but naïve patients take the future into account but assume that quality remains constant, and forward-looking and rational patients foresee the evolution of quality. We rank equilibrium quality provision and show that it is higher under naïve than myopic expectations, while equilibrium quality under rational expectations may be highest or lowest. This result also holds for patient welfare, suggesting that rationality does not always benefit patients. We also show that only under rational expectations may quality be lower than in a market without inertia and switching cost reductions beneficial.