How Hospitals Cope with Competition

KELLOGG INSIGHT— Businesses generally find competition unwelcome. When facing the possible arrival of a new competitor in their market, many firms work to make the newcomer’s entry more difficult. Cutting prices, investing in more capacity and new technology, and increasing advertising are prime examples of strategic behavior intended to dissuade fresh rivals from entering the market.

Leemore Dafny, assistant professor in the Kellogg School’s Department of Management and Strategy, decided to investigate whether the principle of strategic behavior applies to hospitals and other medical institutions. “The main idea is to examine healthcare providers using general economic theory that incorporates profit maximization,” Dafny explains. “That sounds like an obvious approach, but in an industry in which the product is viewed so differently from products of other industries and the suppliers are mainly nonprofit or government-owned, the objectives are potentially different.” In an analysis reported in the Journal of Economics and Management Strategy, she finds that the behavior of the medical business is not so different after all. Read article.