Becoming a bad doctor

We analyze a market with n rational firms (doctors) and a continuum of boundedly rational consumers (patients). Following Spiegler (2006a), we assume that patients are not familiar with the market and rely on anecdotes. We analyze the price setting game played by doctors with given, different healing qualities. Doctors know their own quality, as well as the qualities of their competitors. In the unique equilibrium all doctors, no matter how bad, earn positive profits.If doctors (even costlessly) choose their qualities, doctors mainly offer mediocre qualities in all SPNE. Welfare may strictly decrease in the number of doctors.

► We analyze a market with rational doctors and patients who think anecdotally.
► In the pricing equilibrium, all doctors, no matter how bad, earn positive profits.
► Then we let doctors choose their qualities in a first stage.
► In SPNE, doctors offer treatments far worse than the costless optimal ones.
► Welfare may strictly decrease in the number of doctors.