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Vertical integration and exclusive vertical restraints in health-care markets

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  • Rudy Douven

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  • Victoria Shestalova

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  • Rein Halbersma
  • Katalin Katona
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    Abstract

    We examine vertical integration and exclusive vertical restraints in health-care markets where insurers and hospitals bilaterally bargain over contracts. We employ a bargaining model in a concentrated health-care market of two hospitals and two health insurers competing on premiums. Without vertical integration, some bilateral contracts will not be concluded only if hospitals are sufficiently differentiated, whereas with vertical integration we find that a breakdown of a contract will always occur. There may be two reasons for not concluding a contract. First, hospitals maychoose to soften competition by contracting only one insurer in the market. Second, insurers and hospitals may choose to increase product differentiation by contracting asymmetric hospital networks. Both types raise total industry profits and lower consumer welfare.

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    Bibliographic Info

    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 172.

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    Date of creation: Mar 2011
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    Handle: RePEc:cpb:discus:172

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    1. Catherine C. de Fontenay & Joshua S. Gans, 2004. "Vertical Integration in the Presence of Upstream Competition," Department of Economics - Working Papers Series 904, The University of Melbourne.
    2. de Fontenay, Catherine C. & Gans, Joshua S. & Groves, Vivienne, 2010. "Exclusivity, competition and the irrelevance of internal investment," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 336-340, July.
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