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Entry and Competition in Local Hospital Markets

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  • Jean M. Abraham
  • Martin S. 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 competition in local markets for hospital services. We examine the effect of market structure on competition in local hospital markets -- specifically, does the hardness of 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 U.S. hospital industry. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market. The fourth entrant has little estimated effect. The use of quantity information allows us to infer that entry is consumer-surplus-increasing.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11649.

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Date of creation: Oct 2005
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Publication status: published as Abraham, Jean Marie, Martin Gaynor, and William B. Vogt. "Entry and Competition in Local Hospital Markets." Journal of Industrial Economics 55, 2 (June 2007): 265-88.
Handle: RePEc:nbr:nberwo:11649

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