Competition on Unobserved Attributes: The Case of the Hospital Industry

To assess strategic interactions in industries where endogenous product haracteristics are unobserved to the researcher, we propose an empirical method that brings a competition-in-utility-space framework to the data. We apply the method to the French hospital industry. The utilities offered to patients are inferred from local market shares under AKM exclusion restrictions. The hospitals' objective functions are identified thanks to the gradual introduction of stronger financial incentives over the period of study. Offering more utility to each patient entails incurring higher costs per patient, implying that utilities are mostly strategic complements. Counterfactual simulations show that stronger incentives affect market shares but have little impact on the total number of patient admissions. We quantify the resulting gains for patients and losses for hospitals.