Why Do Previous Choices Matter for Hospital Demand? Decomposing Switching Costs from Unobserved Preferences

Abstract

Using data on women’s choice of hospital for childbirth in Florida, we find that women return to the same hospital approximately 70% of the time. We separate explanations of switching costs and unobserved preference heterogeneity using a panel data fixed effects estimator and find that switching costs account for approximately 40% of the demand effects of a lagged dependent variable. The welfare effects of excluding a hospital from a payer’s network are smaller in the short run but higher in the long run, given our estimates of switching costs, and the dynamic effects of entry on competition are significantly smaller.