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Network Formation and Bargaining in Vertical Markets: The Case of Narrow Networks in Health Insurance

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  • Soheil Ghili

    (Yale University, New Haven, Connecticut 06520)

Abstract

This paper develops a model of vertical markets with multiple upstream and downstream firms. Networks of vertical relationships, negotiated contract terms for those relationships, and downstream prices charged to end customers all arise endogenously. In addition, I provide an estimation procedure to fully rationalize the observed network and contracts in a computationally scaleable manner. I empirically apply the framework to the market between hospitals and health insurers. I use the model to quantify the effects of “network adequacy regulations,” which are designed to broaden patients’ hospital choice sets but can backfire by increasing prices. I show that “tight” regulations have adverse effects. I also show market response is substantially impacted by complex mechanisms involving the interplay among multiple insurers and between upstream negotiation and downstream pricing.

Suggested Citation

  • Soheil Ghili, 2022. "Network Formation and Bargaining in Vertical Markets: The Case of Narrow Networks in Health Insurance," Marketing Science, INFORMS, vol. 41(3), pages 501-527, May.
    • Handle: RePEc:inm:ormksc:v:41:y:2022:i:3:p:501-527
    DOI: 10.1287/mksc.2021.1331
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    References listed on IDEAS

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    Cited by:

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    2. YOON, Kiho, 2025. "Upstream Competition and Exclusive Content Provision in Media Markets," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 66(2), pages 61-92, December.
    3. Chambolle, Claire & Christin, Clémence & Molina, Hugo, 2023. "Buyer power and exclusion: A progress report," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    4. Soheil Ghili & Matt Schmitt, 2024. "Risk Aversion and Double Marginalization," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 762-806, June.
    5. Nageeb Ali, S. & Chen-Zion, Ayal & Lillethun, Erik, 2024. "Reselling information," Games and Economic Behavior, Elsevier, vol. 148(C), pages 23-43.
    6. Sylvia Hristakeva, 2022. "Determinants of Channel Profitability: Retailers’ Control over Product Selections as Contracting Leverage," Marketing Science, INFORMS, vol. 41(2), pages 315-335, March.
    7. Xiaodan Liang & John Mullahy, 2025. "Classifying the Integration of Healthcare Providers and Insurers," Health Economics, John Wiley & Sons, Ltd., vol. 34(11), pages 1971-1976, November.

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