Venue: The Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708-0120
Presentation
Is Entry Efficient When Inputs Are Constrained? Lessons from Cardiac Surgery
We consider the welfare economics of firm entry when input supply is inelastic. Prior studies suggest that with elastic supply of inputs, free entry is likely to lead to an inefficiently high number of firms as entrants "steal" business from incumbents. When firms face input scarcity, in contrast, the welfare loss from free entry is reduced. Further, free entry may increase use of high- quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions empirically by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for coronary artery bypass graft (CABG) surgery in the state. Within a few years of the repeal of CON legislation, the number of CABG facilities increased 56 percent. Consistent with the theory, we show that entry led to a redistribution of surgeries from lower- to higher-quality surgeons. The value of the improved outcomes due to this redistribution was roughly equal to the additional fixed costs incurred by new entrants, making firm entry approximately welfare neutral.