Spatial Competition and Market Definition in the Nursing Home Industry ∗

The degree of competition in the nursing home industry has profound implications for regulations, quality and pricing decisions. This paper presents a model of spatial competition in the nursing home industry to investigate how consumer preferences over location can affect the substitutability and the degree of competition between geographically differentiated nursing homes. A random coefficients logit demand model for nursing home care is estimated using census tract demographic infor-mation. The estimates on distance and price show plausible substitution effects and time costs. Simulation results reveal a higher own price elasticity of demand than found in the previous literature. The model is used to examine the impact of changes in the market structure of nursing homes in one hypothetical county. ∗I have greatly benefitted from conversations with Randall Ellis, Marc Rysman and Jacob Glazer.