A Theoretical Model on Medical Tourism Destination and Quality Provision

Abstract

While empirical and conceptual studies highlight the interdependence of hospitals and allied firms in medical-tourism destinations, few offer theoretical models capturing this dimension. This study develops a model featuring two interdependent sectors: hospitals providing medical care and allied-firms offering complementary services (e.g., accommodation, food, transport) that support the stay of patients and their companions in the destination. We examine two market structures: a monopoly hospital providing homogeneous service quality and a vertically differentiated duopoly comprising high-quality and low-quality hospitals. Each structure is analyzed under two institutional settings: non-coordination, where hospitals independently set service-quality to maximize their own profits; and coordination, where a central planning-authority chooses quality levels to maximize joint sectoral profit. Results show a trade-off—coordination improves accessibility and allied-sector profits through lower medical service quality and prices, while non-coordination yields higher medical-service quality and greater profits for the hospital-sector but reduces demand and profitability of the allied-sector. Sensitivity analysis suggests that widening income-dispersion improves medical service-quality under monopoly, but may lower the quality levels under duopoly if the high-end hospital’s initial quality is sufficiently high.

JEL Classifications: D42, D43, L83, Z320