Dynamic nonprice competition in a regulated industry: Evidence from the Maryland hospital industry

Hospital decision-makers are believed to use capital investment as a competitive tool because physicians, who generate demand, prefer to practice in modern facilities with sufficient capacity. Despite this belief, prior research on hospital markets paid little attention to the role of investment as a competitive tool. The objectives of this dissertation are to examine the role of capital investment as a competitive tool in the hospital industry and the effect of market structure and regulation on investment behavior.;The results of the estimation suggest that hospitals consider the response of rival hospitals to their investment behavior when making investment decisions. Although an aggregate measure of investment is used, the extent to which hospitals consider rival hospital reactions varies by service area suggesting the degree of competition in the markets differs. The results further indicate that investment primarily affects the level of market demand but does not affect market share. The firm-specific regulatory constraint is not binding and, therefore, does not affect investment behavior. However, some features of the regulatory system are found to be effective in reducing overall investment.;An adaption of the standard stock adjustment model to the case of hospital investment is estimated using a unique panel data set for the Maryland hospital industry. The aggregate measure of investment and hospital-level market structure variables included in the model permit investigation of the presence of competitive investment behavior at the hospital level. Measures of regulation or service-specific effects of investment are not included in the model which prevents drawing inferences about the nature of competition in different markets or the effect of regulation on investment. These issues are explored by constructing a theoretical model of investment competition that incorporates the provision of multiple hospital services and regulation from which an empirical model is motivated. The effects of investment behavior on the demand for hospital services and the characteristics of competition are analyzed with this model. The effect of regulation on investment is examined in two ways: measures of long-term debt characteristics are included in the empirical model and a firm-specific regulatory constraint is incorporated in the empirical model.