Market Definition in the Hospital Industry: A Structural Approach
Posted: 22 Jun 2007
Date Written: June 14, 2007
The courts have denied seven out of eight government requests to block hospital mergers since 1994. A main reason for this failure has been the inability of the antitrust authorities to convincingly define a geographic market that supports their case. Because there is no standard approach to market definition, a number of geographic market delineation methods have been employed for antitrust enforcement in the hospital industry. We employ a structural model of hospital competition developed by Gaynor and Vogt (2003) to apply the"SSNIP test to hospitals in California. Our analysis of a large subset of hospitals in the state of California using 1995 data suggests that markets implied by analytical methods previously employed in merger cases are, in the majority of instances, substantially larger than those that would be implied by a method rooted in the principles set forth in the FTC and DOJ merger guidelines. The results have important implications for merger analysis in the hospital industry in that they illustrate that reliance on imprecise market definition methods has the potential to lead to badly mistaken geographic market delineation and was likely a contributing factor for the exceptionally permissive legal environment for hospital mergers in the past decade.
JEL Classification: K22,I11
Suggested Citation: Suggested Citation