Working Paper: NBER ID: w16656
Authors: Martin Gaynor; Samuel A. Kleiner; William B. Vogt
Abstract: Market definition is essential to merger analysis. Because no standard approach to market definition exists, opposing parties in antitrust cases often disagree about the extent of the market. These differences have been particularly relevant in the hospital industry, where the courts have denied seven of eight merger challenges since 1994, due largely to disagreements over geographic market definition. We compare geographic markets produced using common ad hoc methodologies to a method that directly applies the "SSNIP test" to hospitals in California using a structural model. Our results suggest that previously employed methods overstate hospital demand elasticities by a factor of 2.4 to 3.4 and define larger markets than would be implied by the merger guidelines's hypothetical monopolist test. The use of these methods in differentiated product industries may lead to mistaken geographic market delineation, and was likely a contributing factor to the permissive legal environment for hospital mergers.
Keywords: Market Definition; Hospital Industry; Antitrust; SSNIP Test
JEL Codes: I11; K21; L1; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Definition Methodology (L17) | Hospital Demand Elasticities (R22) |
| Market Definition Methodology (L17) | Geographic Market Size (R12) |
| Geographic Market Size (R12) | Merger Outcomes (G34) |