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Entry and Competition in Local Hospital Markets

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  • Jean Marie Abraham
  • Martin Gaynor
  • William B Vogt

    ()

Abstract

There has been considerable consolidation in the hospital industry in recent years. Over 900 deals occurred from 1994-2000, and many local markets, even in large urban areas, have been reduced to monopolies, duopolies or triopolies. This surge in consolidation has led to concern about its effect on competition in local markets for hospital services. In this paper we examine the impact of market structure on competition in local hospital markets – specifically, does competition increase with the number of firms? We extend the entry model developed by Bresnahan and Reiss to make use of quantity information and apply it to data on the US hospital industry. The results from the estimation are striking. In the hospital markets we examine, entry leads to markets quickly becoming competitive. Entry reduces variable profits and increases quality. Indeed, most of the effects of entry come from having a second and possibly a third firm enter the market. The use of quantity information allows us to infer that entry is welfare increasing.

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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 03/088.

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Length: 31 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:bri:cmpowp:03/088

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Keywords: analysis of health care markets;

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  1. Krishnan, Ranjani, 2001. "Market restructuring and pricing in the hospital industry," Journal of Health Economics, Elsevier, vol. 20(2), pages 213-237, March.
  2. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, . "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the 2nd Best in Health Care Markets," GSIA Working Papers 1999-E30, Carnegie Mellon University, Tepper School of Business.
  3. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
  4. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  5. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487 Elsevier.
  6. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  8. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 833-882.
  9. Dranove, David & White, William D, 1994. "Recent Theory and Evidence on Competition in Hospital Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 169-209, Spring.
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  11. Dranove, David & Shanley, Mark & White, William D, 1993. "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 179-204, April.
  12. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," Yale School of Management Working Papers ysm119, Yale School of Management.
  13. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  14. Lynk, William J. & Neumann, Lynette R., 1999. "Price and profit," Journal of Health Economics, Elsevier, vol. 18(1), pages 99-116, January.
  15. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
  16. Feldman, Roger & Dowd, Bryan, 1986. "Is there a competitive market for hospital services?," Journal of Health Economics, Elsevier, vol. 5(3), pages 277-292, September.
  17. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  18. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 577-615, May.
  19. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  20. Dranove, David & Ludwick, Richard, 1999. "Competition and pricing by nonprofit hospitals: a reassessment of Lynk's analysis," Journal of Health Economics, Elsevier, vol. 18(1), pages 87-98, January.
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