Internal Non-Price Competition, Pricing, and Incentive Systems in the Cooperative Service Firm: The Case of US Medical Group Practice

Abstract

The model developed in this paper is a model of internal non-price competition among members of a cooperative firm. Members take price arid income distribution method as given, but perceive a positive relationship between their own production of quality and the flow of consumers to them, when constrained by demand. At an internal Nash equilibrium, each member may be producing too much quality, yet will not reduce production for fear of losing customers. In this paper, the focus is on the price and income distribution method, which serve as an incentive mechanism for coordinating behavior. An unusual feature of this model is the switching behavior generated as members of the firm move form the unconstrained to the constrained regime. This feature is incorporated for empirical testing by specifying the model to be estimated as a spline function. The empirical testing is possible due to the existence of a unique data set for American medical group practice.The estimation results of this study confirm the hypotheses of switching behavior and a positive relationship between price and the strength of the link between reward and productivity. This provides strong evidence to support the contention that internal non-price competition is present in cooperative service firms, and that it increases as members' rewards are linked more closely with their own productivity.