A Structural Approach to Market Definition with an Application to the Hospital Industry

68 Pages Posted: 6 Jan 2011 Last revised: 7 Jul 2022

See all articles by Martin Gaynor

Martin Gaynor

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

Samuel A. Kleiner

Government of the United States of America - Federal Trade Commission

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2011

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.

Suggested Citation

Gaynor, Martin and Kleiner, Samuel A. and Vogt, William B., A Structural Approach to Market Definition with an Application to the Hospital Industry (January 2011). NBER Working Paper No. w16656, Available at SSRN: https://ssrn.com/abstract=1735189

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
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National Bureau of Economic Research (NBER)

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Leverhulme Centre for Market and Public Organisation

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Samuel A. Kleiner

Government of the United States of America - Federal Trade Commission ( email )

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William B. Vogt

RAND Corporation ( email )

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National Bureau of Economic Research (NBER)

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