Entry and Competition in Local Hospital Markets / Jean M. Abraham, Martin S. Gaynor, William B. Vogt.

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Abraham, Jean M

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11649.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w11646 Monetary-Fiscal Policy Interactions and the Price Level: Background and Beyond /	nber w11647 Employment Dynamics and Business Relocation: New Evidence from the National Establishment Time Series /	nber w11648 Trusting the Stock Market /	nber w11649 Entry and Competition in Local Hospital Markets /	nber w1165 The Equilibrium Approach to Labor Markets /	nber w11650 Heterogeneous Firms, Agglomeration and Economic Geography: Spatial Selection and Sorting /	nber w11651 Separating the Business Cycle from Other Economic Fluctuations /	Next

October 2005.

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.