Entry and Competition in Local Hospital Markets

Jean Abraham, Martin Gaynor, William B. Vogt

May 2003

Abstract:

There has been considerable consolidation in the hospital industry in recent years. Over 900 deals occurred from 1994-2000, and many local markets, even in large urban areas, have been reduced to monopolies, duopolies, or triopolies. This surge in consolidation has led to concern about its effect on competition in local markets for hospital services. In this paper we examine the impact of market structure
on competition in local hospital markets -- specifically, does competition increase with the number of firms? We extend the entry model developed by Bresnahan and Reiss to make use of quantity information, and apply it to data on the U.S. hospital industry. The results from the estimation are striking. In the hospital markets we examine, entry leads to markets becoming competitive quickly. Entry reduces variable profits and increases quantity. Indeed, most of the effects of entry come from having a second and possibly a third firm enter the market. The use of quantity information allows us to infer that entry is consumer welfare increasing.