Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market

Ken Onishi, Naoki Wakamori, Chiyo Hashimoto and Shun-ichiro Bessho
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Ken Onishi: School of Economics, Singapore Management University
Chiyo Hashimoto: Center for Health Policy/Center for Primary Care and Outcomes Research, Stanford University

No CIRJE-F-1001, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper quantifies the welfare consequences of the medical arms race in the context of MRI adoption. We build and estimate a model of the vertical structure of the industry where MRI manufacturers sell high- and low-quality MRIs in the up- stream market, whereas medical institutions provide medical services to patients in the downstream market. Simulation results suggest that the current free-entry policy in Japan leads to excess MRI adoption. Furthermore, regulating medical institutions' MRI adoption, taxing MRI purchases, or softening competition among MRI manufacturers would increase social welfare substantially by mitigating the business-stealing effect in the downstream market.

Pages: 40 pages
Date: 2016-01
New Economics Papers: this item is included in nep-com and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2016cf1001

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