Entry and Competition in Local Hospital Markets

57 Pages Posted: 4 Dec 2005 Last revised: 31 Oct 2022

See all articles by Jean Marie Abraham

Jean Marie Abraham

University of Minnesota - Twin Cities - School of Public Health

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

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Date Written: October 2005

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.

Suggested Citation

Abraham, Jean Marie and Gaynor, Martin and Vogt, William B., Entry and Competition in Local Hospital Markets (October 2005). NBER Working Paper No. w11649, Available at SSRN: https://ssrn.com/abstract=819809

Jean Marie Abraham

University of Minnesota - Twin Cities - School of Public Health ( email )

15-223 Phillips-Wangensteen Building
Box 729, 420 Delaware Street SE
Minneapolis, MN 55455-0392
United States
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Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
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412-268-5338 (Fax)

National Bureau of Economic Research (NBER)

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Leverhulme Centre for Market and Public Organisation

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William B. Vogt

RAND Corporation ( email )

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Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER)

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United States

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