Market Definition in the Hospital Industry: A Structural Approach

Posted: 22 Jun 2007

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)

Date Written: June 14, 2007

Abstract

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

Gaynor, Martin and Kleiner, Samuel A. and Vogt, William B., Market Definition in the Hospital Industry: A Structural Approach (June 14, 2007). iHEA 2007 6th World Congress: Explorations in Health Economics Paper, Available at SSRN: https://ssrn.com/abstract=993924

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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Samuel A. Kleiner

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

600 Pennsylvania Ave., NW
Washington, DC 20580
United States

William B. Vogt

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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