Market Structure and Profit Complementarity: The Case of SPECT and PET

The paper examines how the market structure in which a firm operates affects complementarity in its decisions to adopt service-oriented technologies. Adoption decisions over multiple technologies often exhibit interdependence and the competitive environment in which a firm operates can substantially affect such interdependence. We use the case of hospital adoption of SPECT and PET diagnostic imaging technologies to illustrate the effects of market structure on profit complementarity between decisions. A monopolist hospital faces strong cannibalization of SPECT service utilization by adopting PET as well. With one or more competing hospitals in the market for SPECT service, the potential for self-cannibalization diminishes, and hence we would expect complementarity to increase. We test for changes in profit complementarity between the adoption of SPECT and PET technologies using a static discrete choice framework that accounts for the strategic nature of adoption among market rivals. Specifically, we use observed variation in joint versus separate adoption of the two technologies across rival adoption strategies to infer changes in the relative profitability of joint versus separate adoption. We account for the endogeneity of a rival hospital's adoption decisions using a recursive approach based on alternating parameter estimation and equilibrium solution. We find evidence that hospitals in more competitive hospital markets face greater profit complementarity between their adoption decisions; however, the primary motivation for adopting these technologies appears to be patient feeding rather than direct service profit maximization. We discuss implications for inference about technology adoption in strategic settings. In particular, we argue that neglecting variation in profit complementarity across market structures can result in biased estimates, even when only the adoption of one technology is of interest.