Dynamic entry deterrence in the UK pathology services market

This paper describes work on a dynamic model of entry deterrence applied to the UK National Health Service (NHS) market for pathology services. The model, based on a game theoretical framework, is concerned with decision support applications. Presented in this paper is a case study analysis of a geographical region in which a provider of pathology services is concerned at the prospect of being exposed to competition from a new entrant. The incumbent provider may undertake strategic investments to create a stock of knowledge and goodwill with the intention of dissuading others from entering the market. The effect of a new entrant is modelled as perturbation of a pre-existing stable Nash-Cournot equilibrium in an oligopolistic market, and is influenced by market forces subject to Government regulation. The original contribution of this study is to identify the nature of these potential strategic investments and their interaction with cash flows. Recent historical data and managerial analysis are used to characterise market growth. An estimate of the incumbent provider's market share which is at risk can be found by examining the local geographical distribution of providers and purchasers of pathology services. On the basis of this analysis we propose a method for obtaining the strategic investment profile which minimises the total investment required to deter entry.