Entry Behavior in a Regulated Industry: Impact on Labor Demand

Project Start:12/2016
Researchers:Christine Zulehner
Category: Macro Finance
Funded by:LOEWE

As in other European countries, the health market in Austria is highly regulated. Pharmacies as well as doctors are subject to entry and conduct regulation argued to ensure a minimum availability of supply in less profitable, mostly rural areas without inducing excessive entry elsewhere. We plan to evaluate the effect of these regulations on the number of pharmacies and doctors and specify an empirical entry model in the spirit of Bresnahan and Reiss (1990, 1991).

The model will accommodate the Austrian institutional characteristics. Pharmacies receive high regulated markups over wholesale costs and are protected from additional competition through geographic entry restrictions. The market for physicians works in the following way. Patients in Austria hold a mandatory health insurance with the health insurance funds at the provincial level. These funds conclude contracts with resident physicians and medical specialists (“Vertragsarzt”, i.e., contracted doctor). The number of contracted doctors in a region depends on the population density and on epidemiological benchmarks. The contracted doctors receive their payments for provided services directly from the insurance fund based on pre-negotiated tariffication. In addition, doctors who are not offered such a social security contract provide their services on the free market, choosing their location autonomously (“Wahlarzt”, i.e., free doctors). Their services are always directly paid by the patients rather than by the health insurance company. However, patients will be refunded part of the expenses for those services that would also be covered in case of contracted partners (up to a maximum of 80 percent of the amount that would have paid the contracted doctor for the same service).

Based on Schaumans and Verboven (2008) and Schaumans (2010), our model will allow for the strategic interaction between pharmacies and two groups of physicians, i.e. contracted and free doctors. We start by modeling a static entry game, but as the number of free physicians is increasing over time, we also plan to consider dynamic strategic effects. The entry model can be used to draw inferences about the competitive interaction within and between professions and about unobserved payoffs from the equilibrium relationship between the observed market structure and market characteristics like market size. Finally, we estimate the effect of entry on labor demand.