Labor and Product Market Power, Endogenous Quality, and the Consolidation of the US Hospital Industry

Existing structural analyses of the harmful effects of market consolidation focus on either product or labor markets in isolation, ignoring that product market competitors often compete for workers as well. This paper develops a unified framework for merger evaluation, finding that firms' simultaneous exercise of oligopoly power in the product market and oligopsony power in the labor market amplifies the harm from mergers to both consumers and workers. The model also demonstrates how merger-induced gains in labor market power incentivize firms to reduce product quality, highlighting an additional channel for consumer harm. The model's predictions are tested and quantified in the context of the recent consolidation of the US hospital industry. Linking panel data from several sources on all US hospitals from 1996-2022, a difference-in-differences design is estimated for nearly 150 high-concentration within-market mergers. Hospital mergers significantly reduce patient volume, increase prices, reduce employment, lower wages, and deteriorate quality of care, resulting in higher patient mortality. After recovering the structural parameters, the estimated model replicates observed merger impacts. Counterfactual exercises reveal that ignoring increased labor (product) concentration would lead one to under-predict the harm of mergers to consumers (workers).