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

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  • Frech, Ted E

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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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt7cd1329w.

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Date of creation: 04 Sep 1998
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Handle: RePEc:cdl:ucsbec:qt7cd1329w

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Cited by:
  1. Lindrooth, Richard C. & Lo Sasso, Anthony T. & Bazzoli, Gloria J., 2003. "The effect of urban hospital closure on markets," Journal of Health Economics, Elsevier, vol. 22(5), pages 691-712, September.
  2. 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).
  3. Mobley, Lee R., 2003. "Estimating hospital market pricing: an equilibrium approach using spatial econometrics," Regional Science and Urban Economics, Elsevier, vol. 33(4), pages 489-516, July.
  4. Natalia Zhivan & Mark Diana, 2012. "U.S. hospital efficiency and adoption of health information technology," Health Care Management Science, Springer, vol. 15(1), pages 37-47, March.
  5. Kim-Huong Nguyen & Tim Coelli, 2009. "Quantifying the effects of modelling choices on hospital efficiency measures: A meta-regression analysis," CEPA Working Papers Series WP072009, School of Economics, University of Queensland, Australia.
  6. Sari, Nazmi, 2003. "Efficiency outcomes of market concentration and managed care," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1571-1589, December.

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