Hospital quality choice and market structure in a regulated duopoly

This paper analyzes the optimal structure of a regulated health care industry in a model in which the regulator cannot enforce what hospitals do (unverifiable quality of health) or does not know what hospitals know (incomplete information about production costs) or both. We show that if quality is unverifiable the choice between monopoly and duopoly does not change with respect to the verifiable case but, if there are fixed costs (assumed to be quality dependent) and the monopoly is the optimal market structure, the quality level of the operative hospital decreases. Asymmetry of information introduces informational rents that can be reduced by increasing the most efficient hospital's market share. A monopoly is chosen more often.