This paper studies the effect of competition on prices on a health care market where prices are market determined; the Swedish market for dental care. The paper adds to the literature by addressing the empirical challenge of identifying the effect of competition on prices. The empirical strategy exploits that the effect of competition differs across services, depending on the characteristics of the service. Price competition is theoretically more intense for services such as examinations and diagnostics (first-stage services), compared to more complicated and unusual treatments (follow-on services). This is because consumers are better informed and thus more price sensitive with respect to first-stage services and face costs for switching once they have chosen a provider. By exploiting this difference, I identify a relative effect of competition on prices. The results suggest small but statistically significant negative effects on prices for first-stage services relative to follow-on services. A 1% increase in competition from one year to the next is followed by an increase in the price difference in the range 0.0089% to 0.017%. These are short-term effects and provide evidence of strategic behavior of clinics. Hence, substantial effects of competition on prices over time cannot be ruled out. Policy simulations suggest that the absolute effect of competition on prices is in the range -0.01% to -0.09%. Thus, the policy simulations suggest that there is room for price decreases in the Swedish market for dental care and that increased competition would be welfare enhancing.
Keywords: Competition, Firm Behavior, Pricing, Switching Costs, Asymmetric Information, Health Care, Dental Care