Observable quality competition in the hospital industry

This study examines whether hospital competition affects observable quality--quality as reflected in patients' choices. I develop a model to describe how competition should affect quality when prices are fixed, and how quality choice will be affected when hospitals under common ownership are substitutes for each other. I test the model using data from south Florida for the years 2003-2007. The results show that competition leads to higher observable quality, and that hospitals lower quality when they face a greater amount of within-system substitutability. Merger simulations show that this substitution effect could have a significant impact on patients' hospital choices.