DP14005 Entry decisions and asymmetric competition between non-profit and for-profit homes in the long-term care market

Author(s): Iris Grant, Iris Kesternich, Johannes Van Biesebroeck
Publication Date: September 2019
Keyword(s): Competition, For-profit, Long-term care, non-profit
JEL(s): I11, L13, L22, L33
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14005

The demand for long-term care (LTC) services is growing strongly, mostly due to population aging. Historically, the German LTC market was dominated by non-profit nursing homes, but the recent entry wave was tilted towards for-profit competitors. Using a rich administrative dataset on all LTC facilities in Germany, we examine strategic interaction between these two ownership types in a static entry model. The estimates of competitive effects imply that non-profit and for-profit homes are substitutes, but competition is much stronger within-type, suggesting that they provide differentiated products. For-profit homes in particular act as if they operate in a different market segment, but over time their entry behavior has converged to that of the more established non-profits. Counterfactual simulations of proposed changes in government policy suggest that even small changes favoring either type could have a large impact on the fraction of markets that remain unserved or only served by a single type.