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

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  • 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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    2. Berden, Carolien & Croes, R. & Kemp, R. & Mikkers, Misja & van der Noll, Rob & Shestalova, V. & Svitak, Jan, 2019. "Hospital Competition in the Netherlands : An Empirical Investigation," Discussion Paper 2019-008, Tilburg University, Tilburg Law and Economic Center.
    3. Philippe Gagnepain & Stéphane Gauthier, 2021. "Strategic uncertainty and market size: An illustration on the Wright amendment," Working Papers halshs-03359597, HAL.
    4. Dingel, Jonathan & Gottlieb, Joshua & Lozinski, Maya & Mourot, Pauline, 2023. "Market Size and Trade in Medical Services," CEPR Discussion Papers 18029, C.E.P.R. Discussion Papers.
    5. 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 261-288, October.
    6. Julie Carlson & Ginger Zhe Jin & Matthew Jones & Jason O’Connor & Nathan Wilson, 2017. "Economics at the FTC: Deceptive Claims, Market Definition, and Patent Assertion Entities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 51(4), pages 487-513, December.
    7. 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.
    8. Olatunji Abdul Shobande & Mobolaji Daniel Akinbomi, 2020. "Competition dynamics in Nigerian aviation industry: a game theoretic approach," Future Business Journal, Springer, vol. 6(1), pages 1-8, December.
    9. 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.
    10. Chiara Brouns & Rudy Douven & Ron Kemp, 2021. "Prices and market power in mental health care: Evidence from a major policy change in the Netherlands," Health Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 803-819, April.
    11. Anna I. Meleshkina & Irina N. Filippova & Andrey E. Shastitko, 2022. "Empirical geographic market definition for antitrust: The case of the Russian cement market," Upravlenets, Ural State University of Economics, vol. 13(6), pages 15-29, January.
    12. Keaton S. Miller & Wesley W. Wilson, 2018. "Governance Structure and Exit: Evidence from California Hospitals," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(1), pages 31-55, August.
    13. Andrew Sfekas, 2019. "Quality Competition and Intra-System Substitution in the Hospital Industry," American Journal of Health Economics, MIT Press, vol. 5(1), pages 65-96, Winter.
    14. Nathan E. Wilson, 2021. "The Impact of Competition on Investment: Evidence From California Hospitals," Journal of Industrial Economics, Wiley Blackwell, vol. 69(1), pages 1-32, March.
    15. Chiara Brouns & Rudy Douven & Ron Kemp, 2021. "Prices and market power in mental health care: Evidence from a major policy change in the Netherlands," Health Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 803-819, April.
    16. Raval, Devesh & Rosenbaum, Ted & Wilson, Nathan E., 2021. "How do machine learning algorithms perform in predicting hospital choices? evidence from changing environments," Journal of Health Economics, Elsevier, vol. 78(C).
    17. Devesh Raval & Ted Rosenbaum & Nathan E. Wilson, 2022. "Using disaster‐induced closures to evaluate discrete choice models of hospital demand," RAND Journal of Economics, RAND Corporation, vol. 53(3), pages 561-589, September.
    18. 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.

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    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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