Working Paper: NBER ID: w11649
Authors: Jean M. Abraham; Martin S. Gaynor; William B. Vogt
Abstract: There has been considerable consolidation in the hospital industry in recent years. Over 900 deals occurred from 1994-2000, and many local markets, even in large urban areas, have been reduced to monopolies, duopolies, or triopolies. This surge in consolidation has led to concern about competition in local markets for hospital services. We examine the effect of market structure on competition in local hospital markets -- specifically, does the hardness of competition increase with the number of firms? We extend the entry model developed by Bresnahan and Reiss to make use of quantity information, and apply it to data on the U.S. hospital industry. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market. The fourth entrant has little estimated effect. The use of quantity information allows us to infer that entry is consumer-surplus-increasing.
Keywords: No keywords provided
JEL Codes: I1; L1; L8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entry into local hospital markets (I11) | Increased Competition (L13) |
| Entry into local hospital markets (I11) | Decrease in variable profits (D21) |
| Entry into local hospital markets (I11) | Increase in quantity (O42) |
| Increased Competition (L13) | Increase in consumer surplus (D11) |