lecture 9 - market definition as a preliminary step for effective hospital merger control Flashcards
relevant product market
“A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use.”
relevant geographical market
“The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.”
patients’ willingness to travel
The more patients are willing to travel, the larger the geographic market, so less chance a hospital merger is anticompetitive.
problems with E/H test
“Of the many problems with E/H one particularly stand out in hospital mergers – what we have elsewhere labelled the silent majority fallacy (not travelling before the merger and also not thereafter). To wit, the presence of a small percentage of shoppers does not discipline firms from using market power. Non-traveling customers are a silent majority, left with fewer choices after a merger.”
the test suggests that the hospitals are all offering the same products and that the preferences of the travelling patients are indicative of the preference of the non-traveling patients.
- Option demand (OD) approach
o Depicts hospital competition in a managed care setting
- Insurers contract with hospitals and consumers commit to a potentially restricted network of providers
o Focus is on patients’ willingness-to-pay (WTP) for the inclusion of a given hospital in their choice set
- WTP depends on consumers’ characteristics and ability of the hospital to meet their expected health care needs
o For geographic market definition, simulate mergers by calculating the additional bargaining power two hospitals have when jointly entering or withdrawing a network
cross-market mergers
“One area of research that has generated a lot of interest, but as yet no antitrust litigation, is cross-market mergers. A cross-market merger (…) combines hospitals that are geographically separate and are not viewed by patients as close substitutes. Recent research offers evidence of price increases following such mergers, but economists have not reached a consensus on the cause and mechanisms of such price increases.”
When hospitals are not part of the same geographic market a merger will not have the effect in terms of a dominant position. Mergers between hospitals that are located in different geographic markets (cross-market mergers) are also potentially anticompetitive; can also result in price increases.
- Potential competitive effects: cross market merger
o Hospital more valuable to MCO if member of system across markets
- It is more difficult not to contract a company if there are many locations across the country
o Mutual benefits MCO & hospitals
o Additional information & support for member hospitals
- for example if two or three hospitals are part of the same organization located in different parts of the country, but they can still learn from experiences with contract negotiations with insurers and that might help them in each of the different markets to negotiate higher prices
how to measure willingness to travel
- Revealed preference data: Look at claims data for analysing where patients live
o Advantage: real choices by patients in actual situations
o Disadvantage: does not allow to take into account the changes in which decisions were made - Stated preference data (hypothetical options and which of the 2 alternatives do patients prefer)
o Ask what patients think they would do in a situation
o More precise what patients would do in certain situations
