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Estimation and Identification of Merger Effects: An Application to Hospital Mergers

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  • Leemore S. Dafny

Abstract

Advances in structural demand estimation have substantially improved economists' ability to forecast the impact of mergers. However, these models rely on extensive assumptions about consumer choice and firm objectives, and ultimately observational methods are needed to test their validity. Observational studies, in turn, suffer from selection problems arising from the fact that merging entities differ from non-merging entities in unobserved ways. To obtain an accurate estimate of the effect of consummated mergers, I propose a combination of rival analysis and instrumental variables. By focusing on the effect of a merger on the behavior of rival firms, and instrumenting for these mergers, unbiased estimates of the effect of a merger on market outcomes can be obtained. Using this methodology, I evaluate the impact of independent hospital mergers between 1989 and 1996 on rivals' prices. I find sharp increases in rivals' prices following a merger, with the greatest effect on the closest rivals. The results for this industry are more consistent with predictions from structural models than with prior observational estimates.

Suggested Citation

  • Leemore S. Dafny, 2005. "Estimation and Identification of Merger Effects: An Application to Hospital Mergers," NBER Working Papers 11673, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11673
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    References listed on IDEAS

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    1. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487 Elsevier.
    2. Robert Connor & Roger Feldman & Bryan Dowd, 1998. "The Effects of Market Concentration and Horizontal Mergers on Hospital Costs and Prices," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(2), pages 159-180.
    3. Tay, Abigail, 2003. " Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
    4. Leemore S. Dafny, 2005. "How Do Hospitals Respond to Price Changes?," American Economic Review, American Economic Association, vol. 95(5), pages 1525-1547, December.
    5. Dranove, David & White, William D, 1994. "Recent Theory and Evidence on Competition in Hospital Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 169-209, Spring.
    6. Gaynor, Martin & Vogt, William B, 2003. " Competition among Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 764-785, Winter.
    7. 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.
    8. Ho, Vivian & Hamilton, Barton H., 2000. "Hospital mergers and acquisitions: does market consolidation harm patients?," Journal of Health Economics, Elsevier, vol. 19(5), pages 767-791, September.
    9. Dranove, David & Lindrooth, Richard, 2003. "Hospital consolidation and costs: another look at the evidence," Journal of Health Economics, Elsevier, vol. 22(6), pages 983-997, November.
    10. Krishnan, Ranjani, 2001. "Market restructuring and pricing in the hospital industry," Journal of Health Economics, Elsevier, vol. 20(2), pages 213-237, March.
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    Cited by:

    1. Akosa Antwi Yaa & Gaynor Martin S & Vogt William B, 2009. "A Bargain at Twice the Price? California Hospital Prices in the New Millennium," Forum for Health Economics & Policy, De Gruyter, vol. 12(1), pages 1-23, July.
    2. Jeffrey T. Prince & Daniel H. Simon, 2014. "The Impact of Mergers on Quality Provision: Evidence from the Airline Industry," Working Papers 2014-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    3. Melnick, Glenn & Keeler, Emmett, 2007. "The effects of multi-hospital systems on hospital prices," Journal of Health Economics, Elsevier, vol. 26(2), pages 400-413, March.
    4. Robert Town & Douglas Wholey & Roger Feldman & Lawton R. Burns, 2006. "The Welfare Consequences of Hospital Mergers," NBER Working Papers 12244, National Bureau of Economic Research, Inc.
    5. Dranove, David & Lindrooth, Richard & White, William D. & Zwanziger, Jack, 2008. "Is the impact of managed care on hospital prices decreasing?," Journal of Health Economics, Elsevier, vol. 27(2), pages 362-376, March.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L0 - Industrial Organization - - General

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