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Papers Reg. Sci.

83, 631–648 (2004)


DOI: 10.1007/s10110-004-0219-x


c RSAI 2004

Finding locations for public service centres that


compete with private centres: Effects of congestion
Vladimir Marianov1 , Miguel Rı́os2 , Paulina Taborga3
1 Department of Electrical Engineering, Pontificia Universidad Católica de Chile,
Vicuña Mackenna 4860, Santiago, Chile
(e-mail: marianov@ing.puc.cl)
2 Department of Electrical Engineering, Pontificia Universidad Católica de Chile,
Vicuña Mackenna 4860, Santiago, Chile
3 LAN Chile, Presidente Riesco 5711, Piso 17, Santiago, Chile

Received: 8 February 2003 / Accepted: 9 September 2003

Abstract. We propose a locational model for public service centres when they
compete with private centres. Customers may be captured by the centre offering
shorter distance or lower waiting times. Both types of centres provide paid services
to high-income customers, and public centres also provide subsidised services to
low-income customers. Equilibrium must be found in public centres between low-
income population coverage and high-income population capture. We analyse the
effects of waiting times on the design of the public service and apply the model to
data for Santiago, Chile.

JEL classification: C61, I18, L33

Key words: Location, health services, competition, public services, waiting time

1 Introduction

Chile’s health system consists of both private and public providers. Most of the
financing of the public system comes from tax contributions and compulsory con-
tributions by working individuals affiliated to this system. The private system is
financed by compulsory and optional health premiums from individuals who par-
ticipate in this more expensive system. The public system is also responsible for
providing health services to low-income individuals and persons who are unable to
pay. These services are subsidised. The goal of the Ministry of Health in charge of
public health policies is to promote equity, in that all citizens should have access

This research has been partly funded by FONDECYT (Chilean Science and Technology Research
Fund) Project Nr. 1020778.
632 V. Marianov et al.

to some basic minimum level of health care, while reducing individual economic
risk in the event of major illnesses or expensive treatments. Another goal is to pro-
vide quality services at a minimum cost (Alleyne 2000). A good description of the
Chilean health system in 1999 can be found in Pan American Health Organization
(1999). Many Latin American health systems are similarly organised.
Within the past ten years concern has increased in Chile about the existing in-
equities in the provision of health care to different income groups. The report by
Núñez (2002) documents the differences in various health care services (such as
primary care, medical specialties, emergency) for individuals covered by public and
private health insurance, and those with different family incomes. One of the re-
port’s conclusions shows that public services receive delayed health interventions.
Furthermore, from a customer’s viewpoint, public health services are less satis-
factory than private services. User opinion polls indicate dissatisfaction with both
public and private facilities, but for different reasons. In the case of public services,
dissatisfaction arises due to poor and late treatment, inadequate environment, and
technological obsolescence. In private facilities dissatisfaction is associated with
lengthy waits in waiting rooms (Pan American Health Organization 1999).
Due to inadequate funding in the public health sector, until recently, certain
expensive services such as CT scans or MRI were not formally included in the
subsidised health services provided to low-income population. There was no re-
liable information on how many CT scanners or other advanced radio diagnostic
equipment were being used in public services (Pan American Health Organization
1999). A recently introduced public health program has aimed to subsidise a num-
ber of the more expensive services provided to low-income individuals. However,
debate continues about health policies, in particular, about which features of health
care should be considered essential public goods financed by the state, and those
which should be considered as private goods, or more succinctly, the responsibility
of each individual. Because of the insufficient budget and doubts raised about the
financial sustainability of the public health system, this debate will continue.
Due to the above, since the early 1990s, Chile’s Ministry of Health has called
for the participation of all sectors – public, private, NGOs (Non Governmental
Organisations) – as a strategy to address health concerns. In several meetings by
the Pan American Health Organization from 2000 to 2002, the Chilean government
signed commitments targeted towards promoting equity, quality and efficiency in
health provision. In a statement signed by the governments of Chile and Costa Rica
in October, 2002, the Ministers of Health of both countries agreed, among other
actions, to “Establish healthy public policies that promote quality of life and social
development beyond the health sector, contributing to forming alliances between
public and private sectors and civil society” (Pan American Health Organization
2002). One of the support mechanisms for this action is to establish “partnerships
between public and private sectors and NGOs” (Pan American Health Organization
2002). These partnerships would have different structures, ranging from third-party
schemes in which the public sector sub-contracts private health providers, to a
competitive scheme where public providers compete against other public providers
(Pan American Health Organization 1999). This public-private co-operation could

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