| Abstract:
We examine competition in the hospital industry,
in particular the effect of ownership type (for-profit,
not-for-profit, government). We estimate a structural model
of demand and pricing in the hospital industry in
California, then use the estimates to simulate the effect of
a merger. California hospitals in 1995 face an average price
elasticity of demand of -4.85. Not-for-profit hospitals
face less elastic demand and act as if they have lower
marginal costs. Their prices are lower than those of
for-profits, but markups are higher. We simulate the effects
of the 1997 merger of two hospital chains. In San Luis
Obispo County, where the merger creates a near monopoly,
prices rise by up to 53%, and the predicted price increase
would not be substantially smaller were the chains
not-for-profit.
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