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Efficiency, Growth and Concentration: An Empirical Analysis of Hospital Markets

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Ted Frech (University of California, Santa Barbara)

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Abstract

Taking an evolutionary view of markets, Harold Demsetz hypothesized that firms differ persistently in efficiency and that industry concentration results from growth of efficient firms at the expense of inefficient ones. We test the hypothesis with high quality microdata from the US hospital industry, an industry of keen policy and scientific interest. We measure efficiency by firm in the early 1980s and relate it to subsequent growth of efficient firms, to the persistence of profit differences and to changes in the concentration of markets. Initial hospital efficiency and subsequent growth (and profitability) are significantly and positively related. Also, greater initial variation in hospital efficiency within local markets is positively related to subsequent growth in market concentration. These findings support the logic of Demsetz's evolutionary efficiency hypothesis, though they cannot confirm the stronger idea that variation in firm efficiency is the dominant explanation for changes in concentration.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 14-98.

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Date of creation: 04 Sep 1998
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Handle: RePEc:cdl:ucsbec:14-98

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  1. Edwards, Seanicaa & Allen, Albert J. & Shaik, Saleem, 2006. "Market Structure Conduct Performance (SCP) Hypothesis Revisited using Stochastic Frontier Efficiency Analysis," 2006 Annual meeting, July 23-26, Long Beach, CA 21350, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Lee Mobley & Ted Frech & Luc Anselin, 2008. "Spatial Interaction, Spatial Multipliers, and Hospital Competition," University of California at Santa Barbara, Economics Working Paper Series 07-08, Department of Economics, UC Santa Barbara. [Downloadable!]
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