Discussion Papers 2016

CIRJE-F-1001

"The Welfare Consequences of Free Entry in Vertical Relationships: The Case of the MRI Market"

Author Name

Onishi, Ken, Naoki Wakamori, Chiyo Hashimoto and Shun-ichiro Bessho

Date

February 2016

Full Paper

PDF File

Remarks

Revised in August 2016. 

Abstract

This paper quanti es the welfare consequences of the medical arms race in the context of MRI adoption. We build and estimate a model of the vertical structure of the industry where MRI manufacturers sell high- and low-quality MRIs in the up- stream market, whereas medical institutions provide medical services to patients in the downstream market. Simulation results suggest that the current free-entry policy in Japan leads to excess MRI adoption. Furthermore, regulating medical institutions' MRI adoption, taxing MRI purchases, or softening competition among MRI manufacturers would increase social welfare substantially by mitigating the business-stealing effect in the downstream market.

Keywords: Vertical relationship, Free entry, MRI industry, Healthcare market.