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Competition and Market Power in Option Demand Markets

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  • Capps, Cory
  • Dranove, David
  • Satterthwaite, Mark

Abstract

We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets." In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each supplier's market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the supplier's inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. " Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-763, Winter.
  • Handle: RePEc:rje:randje:v:34:y:2003:i:4:p:737-63
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