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Boundedly Rational Bargaining in Option Demand Markets: An Empirical Application

Posted: 16 Jun 2007  

Date Written: June 13, 2007

Abstract

In this study, we develop and estimate a model of sophisticated bargaining between hospitals and insurers, based on a model of intrafirm bargaining set out by Stole and Zwiebel (1996). When an insurer decides whether to include a hospital in its network, it must take into account the fact that excluding the hospital gives the hospitals already in the network additional bargaining power, allowing them to negotiate for higher prices. The hospital is aware of this problem and will also account for this inframarginal effect. Although in theory both parties should take into account all possible hospital networks, in practice it is unlikely that any hospital or insurer will be this sophisticated. We therefore estimate parameters for hospital prices, the fraction of consumer surplus going to the hospitals, and the level of rationality of both parties. Using hospital financial records and patient discharge records, we estimate this model for the hospitals in Bakersfield, California and San Diego, California.

Keywords: hospitals, bargaining, health care

JEL Classification: I11, L13

Suggested Citation

Dranove, David and Satterthwaite, Mark and Sfekas, Andrew, Boundedly Rational Bargaining in Option Demand Markets: An Empirical Application (June 13, 2007). iHEA 2007 6th World Congress: Explorations in Health Economics Paper. Available at SSRN: https://ssrn.com/abstract=993519

David Dranove

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8682 (Phone)
847-467-1777 (Fax)

Mark A. Satterthwaite

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Andrew Sfekas (Contact Author)

Northwestern University - Center for Health Industry Market Economics (CHIME) ( email )

Evanston, IL
United States

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