Quality Transparency and Healthcare Competition

Abstract

Transparency about the quality of goods and services offered by firms improves consumer decisions; however, it also informs competitors. We study how competitors respond to increased quality transparency by exploiting a regulatory change that mandates disclosure of quality for all kidney dialysis facilities in the United States. We find that improved quality transparency increases the likelihood of new entry nearby low-quality incumbents. It also increases the sensitivity of demand to quality, reflected in a drop in patient referrals to lower-quality incumbents. Finally, enhanced transparency, via its effect on competition, improves the incumbents’ quality of care, as evidenced by reduced hospitalizations and increased investments in skilled labor.