Regulation and Hospital Competition in a Medical Arms Race

This paper provides a model of hospital competition to explain the "medical arms race", i.e. the tendency of hospitals to over-invest in specialized services. The model examines how hospitals gain an edge ("prestige effect") by adopting a larger complement of services than their rivals. In a medical arms race, ,arket outcomes are made worse than what results under free entry with Cournot interaction. Simulations of equilibria identify cost and demand conditions that lead to the over-provision of services.