A note on hospitals incentives to collude on low quality in a spatial context

Abstract

 This paper analyzes the incentive for a cartel agreement between hospitals. For this purpose we extend a quality competition model developed by Montefiori (2005). We investigate that collusion on a low provided quality level will lead to higher profits for both hospitals. Therefore both hospitals benefit from an agreement. Further we can see if one hospital breaks the cartel rules, while the other stick to the agreement, the defrauding hospital can make additional profits. In addition we study the profits under an infinite time horizon. Under a given specific strategy played by the hospitals, we obtain a particular discount factor under which an agreement still holds.