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A Structural Approach to Market Definition With an Application to the Hospital Industry

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Listed:
  • Martin S. Gaynor
  • Samuel A. Kleiner
  • William B. Vogt

Abstract

Market definition is essential to merger analysis. Because no standard approach to market definition exists, opposing parties in antitrust cases often disagree about the extent of the market. These differences have been particularly relevant in the hospital industry, where the courts have denied seven of eight merger challenges since 1994, due largely to disagreements over geographic market definition. We compare geographic markets produced using common ad hoc methodologies to a method that directly applies the "SSNIP test" to hospitals in California using a structural model. Our results suggest that previously employed methods overstate hospital demand elasticities by a factor of 2.4 to 3.4 and define larger markets than would be implied by the merger guidelines's hypothetical monopolist test. The use of these methods in differentiated product industries may lead to mistaken geographic market delineation, and was likely a contributing factor to the permissive legal environment for hospital mergers.
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Suggested Citation

  • Martin S. Gaynor & Samuel A. Kleiner & William B. Vogt, 2013. "A Structural Approach to Market Definition With an Application to the Hospital Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 243-289, June.
  • Handle: RePEc:bla:jindec:v:61:y:2013:i:2:p:243-289
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    File URL: http://hdl.handle.net/10.1111/joie.12015
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    References listed on IDEAS

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    1. John Van Reenen, 2004. "Is There a Market for Work Group Servers? Evaluating Market Level Demand Elasticities Using Micro and Macro Models," CEP Discussion Papers dp0650, Centre for Economic Performance, LSE.
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    Cited by:

    1. Polk, Andreas & Bilotkach, Volodymyr, 2013. "The assessment of market power of hub airports," Transport Policy, Elsevier, vol. 29(C), pages 29-37.
    2. Searing Elizabeth A. M., 2014. "Charitable (Anti)Trust: The Role of Antitrust Regulation in the Nonprofit Sector," Nonprofit Policy Forum, De Gruyter, vol. 5(2), pages 1-28, October.
    3. Nathan E. Wilson, 2016. "For-profit status and industry evolution in health care markets: evidence from the dialysis industry," International Journal of Health Economics and Management, Springer, vol. 16(4), pages 297-319, December.
    4. Samuel Kleiner & William White & Sean Lyons, 2015. "Market power and provider consolidation in physician markets," International Journal of Health Economics and Management, Springer, vol. 15(1), pages 99-126, March.
    5. David Dranove & Christopher Ody, 2016. "Evolving Measures of Provider Market Power," American Journal of Health Economics, MIT Press, vol. 2(2), pages 145-160, Spring.

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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