Journal of Regulatory Economics

, Volume 32, Issue 2, pp 173-193

First online:

Regulating internal markets for hospital care

  • Rosella LevaggiAffiliated withDipartimento di Scienze Economiche, Università di Brescia Email author 

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Internal markets have been created in an attempt to shift power from producers to consumers in a context where consumers have very weak incentives to seek out low-cost producers and have little knowledge about the quality of health care. The idea is that by establishing public agencies to act as the sole purchasers on behalf of consumers in their area of jurisdiction, the asymmetry of information can be moderated and a more competitive environment created in which costs will be minimized and quality enhanced. Whether these aspirations can be fulfilled will depend on how the internal market is organized. In this article the cost-minimizing properties of alternative market structures where hospitals do not share the same objectives are examined. The scheme is designed from the standpoint of a benevolent regulator that provides services using two hospitals with fixed locations. The paper shows that price discrimination is a superior instrument. Finally some market forms are always dominated and should be avoided.


Internal markets Asymmetry of Information Hospital care

JEL Classifications

I11 I18 D82