Competition in Reduced Form
A central empirical challenge in studying hospital competition is identifying the causal effect of market structure on prices and outcomes. Early empirical work often relied on cross-sectional correlations between measures of concentration and prices, but concerns about endogeneity and market definition have motivated a shift toward research designs that exploit discrete changes in competitiveness. In hospital markets, mergers, closures, and entry events provide natural settings in which competitive conditions change sharply, allowing researchers to study how prices and quality respond.
The reduced-form literature on hospital mergers uses quasi-experimental designs to estimate the effects of consolidation without fully specifying the underlying pricing or bargaining process. These studies typically compare prices or outcomes in markets affected by mergers to those in unaffected markets, using difference-in-differences or event-study approaches. A central finding of this literature is that hospital mergers lead to large and persistent price increases, even in settings with nonprofit ownership and regulated payment systems. This evidence plays a prominent role in antitrust enforcement because it relies on transparent identification strategies and minimal structural assumptions.
In addition to prices, a smaller but important literature studies how consolidation affects hospital quality. Measuring quality responses is empirically challenging, both because quality is multidimensional and because improvements in care coordination may offset reductions in competitive pressure. Existing evidence suggests that quality effects are heterogeneous and often muted relative to price effects, with some studies finding no improvement—and in some cases deterioration—in clinical outcomes following consolidation. These results highlight an important asymmetry in merger effects and reinforce the policy relevance of price-based evidence.
Together, these papers motivate the need for richer models of hospital pricing and incentives, which we take up in the next class on insurer–hospital bargaining. Potential papers for presentation today include:
- Kessler and McClellan (2000) — competition, prices, and quality in hospital markets
- Dafny (2009) — design-based evidence on hospital mergers and price effects
- Gaynor, Moreno-Serra, and Propper (2013) — evidence on hospital competition and patient outcomes