Abstract
We consider the welfare economics of firm entry when the supply of key inputs is
constrained. Prior studies suggest that, with an elastic supply of inputs, free
entry is likely to lead to an inefficiently high number of firms as entrants
“steal” business from incumbents. When firms face input scarcity, in contrast,
the welfare loss from free entry is reduced. Further, free entry may increase
use of high-quality inputs, as monopsonistic firms underuse these inputs when
entry is constrained. We examine these predictions empirically by examining how
the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania
affected the market for coronary artery bypass graft (CABG) surgery in the
state. Within a few years of the repeal of CON legislation, the number of CABG
facilities increased 56 percent. Consistent with the theory, we show that entry
led to a redistribution of surgeries from lower- to higher-quality surgeons. The
improved outcomes of higher-quality surgeons roughly outweighs the additional
fixed costs incurred by new entrants, making firm entry approximately welfare
neutral.