nber working paper series competition among …nber working paper no. 9471 january 2003 jel no. l1,...

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NBER WORKING PAPER SERIES COMPETITION AMONG HOSPITALS Martin Gaynor William B. Vogt Working Paper 9471 http://www.nber.org/papers/w9471 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 2003 Thanks are due to Dan Ackerberg, Ted Frech, Gautam Gowrisankaran, Phillip Leslie, Aviv Nevo, Tom Philipson, Bob Pollack, Catherine Wolfram, and participants in seminars at BYU, Minnesota, NBER, Penn, UCLA, UC Santa Barbara, Washington University, the 10 th Annual Health Economics Symposium at UC Berkeley, and the 1999 Stanford Institute for Theoretical Economics Summer Workshop for useful comments. The usual caveat applies. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Martin Gaynor and William B. Vogt. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including notice, is given to the source.

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Page 1: NBER WORKING PAPER SERIES COMPETITION AMONG …NBER Working Paper No. 9471 January 2003 JEL No. L1, L4, I1 ABSTRACT Our objective is to determine the effect of ownership type (for-profit,

NBER WORKING PAPER SERIES

COMPETITION AMONG HOSPITALS

Martin GaynorWilliam B. Vogt

Working Paper 9471http://www.nber.org/papers/w9471

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138January 2003

Thanks are due to Dan Ackerberg, Ted Frech, Gautam Gowrisankaran, Phillip Leslie, Aviv Nevo, TomPhilipson, Bob Pollack, Catherine Wolfram, and participants in seminars at BYU, Minnesota, NBER, Penn,UCLA, UC Santa Barbara, Washington University, the 10th Annual Health Economics Symposium at UCBerkeley, and the 1999 Stanford Institute for Theoretical Economics Summer Workshop for useful comments.The usual caveat applies. The views expressed herein are those of the authors and not necessarily those ofthe National Bureau of Economic Research.

©2003 by Martin Gaynor and William B. Vogt. All rights reserved. Short sections of text not to exceed twoparagraphs, may be quoted without explicit permission provided that full credit including notice, is given tothe source.

Page 2: NBER WORKING PAPER SERIES COMPETITION AMONG …NBER Working Paper No. 9471 January 2003 JEL No. L1, L4, I1 ABSTRACT Our objective is to determine the effect of ownership type (for-profit,

Competition Among HospitalsMartin Gaynor and William B. VogtNBER Working Paper No. 9471January 2003JEL No. L1, L4, I1

ABSTRACT

Our objective is to determine the effect of ownership type (for-profit, not-for-profit, government)

on firm conduct in hospital markets. Secondary objectives include estimating hospital demand

systems useful for market definition and merger simulation. To this end, we estimate a structural

model of demand and pricing in the short term hospital industry in California, and then use the

estimates to simulate the effect of a merger. Demand is modeled at the level of individual consumers

using discrete choice techniques and micro data on individuals. Price in the demand equation is

endogenous, and we use recently developed instrumental variables techniques to correct for this. We

allow the behavior of for-profit and not-for-profit firms to differ, modeling these differences

structurally following the relevant theory literature. We find that California hospitals in 1995 faced

a downward-sloping demand for their products, with an average price elasticity of demand of -5.67.

Not-for-profit hospitals face less elastic demand and have lower marginal costs. Their prices are

lower, but markups are higher than those of for-profits. We simulate the effects of the 1997 merger

of two hospital chains. In unconcentrated markets such as Los Angeles and San Diego, the merger

has virtually no effect on prices. However, in San Luis Obispo County, where the merger creates a

near monopoly, prices rise by up to 58%, and the predicted price increase would not be substantially

smaller were the chains to be not-for-profit.

Martin Gaynor William B. VogtH. John Heinz III School H. John Heinz III Schoolof Public Policy and Management of Public Policy and ManagementCarnegie Mellon University Carnegie Mellon UniversityPittsburgh, PA 15213-3890 Pittsburgh, PA 15213-3890and NBER and [email protected] [email protected]

Page 3: NBER WORKING PAPER SERIES COMPETITION AMONG …NBER Working Paper No. 9471 January 2003 JEL No. L1, L4, I1 ABSTRACT Our objective is to determine the effect of ownership type (for-profit,

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