A Structural Approach to Market Definition With an Application to the Hospital Industry

Market definition is common in merger analysis, and often the decisive factor in antitrust cases. This has been particularly relevant in the hospital industry, where many merger challenges have been denied due to disagreements over geographic market definition. We compare geographic markets produced using frequently employed ad hoc methodologies to structural methods that directly apply the ‘SSNIP test’ to California hospitals. Our results suggest that markets produced using previous methods overstate hospital demand elasticities by a factor of 2.4 to 3.4 and were likely a contributing factor to the permissive legal environment for hospital mergers.     

Governance Structure and Exit: Evidence from California Hospitals

Most inpatient and emergency health care services in the U.S. are delivered by non-profit organizations. To understand the impact of policies that are designed to affect competitive outcomes in hospital markets, it’s important to understand whether the “non-profit” structure changes the behavior and competitive conduct of firms. Given the complexity of the product space within which hospitals operate, we focus on more easily interpreted decisions within the hospital market: entry and exit. Using comprehensive administrative data for the universe of California hospitals from 1980 to 2013, we document the observed entry and exit behavior. We estimate flexible exit policy functions and demonstrate a difference in behavior between for-profit and non-profit firms that exists after accounting for several observable characteristics of hospitals. We find differences in observed behavior: this is a finding that strongly suggests that there are differences in the underlying objective function of the various firms.     

Structure and Profitability in Banking Markets

We use the structure-performance model and regression analysis to investigate a number of analytical issues that often arise in evaluating competition in connection with bank mergers and that are generally relevant to mergers in other industries. Perhaps our most consistent and strongest finding is that the local market HHI is positively and significantly related to profitability. We also find that the number of organizations and the level of recent deposit growth may provide some additional information on the level of competition. Finally, several variables including market size, the number of large banking firms, deposits per office, and resident migration rates exhibit similar relationships to profitability in the bivariate analysis, suggesting that there may be some characteristic associated with market size, density, or attractiveness that is important for competition.     

Analytical Screens for Electricity Mergers

Electricity mergers pose distinct challenges for competition policy. Electricity demand is highly inelastic in the short run, storage is limited, and transmission constraints limit the ability to substitute generation at other locations. As a result, a merger can affect prices in many different markets and even generators with small market shares may be able to exercise market power. The U.S. Federal Energy Regulatory Commission’s approach for screening horizontal mergers, based on the concentration thresholds in the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines, can fail to identify mergers that lessen competition, and mergers that fail the FERC screen may have no significant anticompetitive effect. We propose competitive residual demand (CRD) analysis, which examines the supply curves of the markets affected by a merger and considers the ability and incentive of firms to raise prices before and after a proposed merger. CRD analysis is a relatively easy way to address the incentives for generators to exercise market power and relies on data that are often available. Vertical (convergent) mergers between electricity and gas raise additional concerns, and we propose a methodology to screen vertical mergers.     

Preemptive mergers under spatial competition

Mergers for market power generally benefit outsider firms more than participating firms. Hence, outsiders should welcome such mergers between their competitors but, frequently, this is not the case. Under spatial competition some outsiders gain more than the participating firms but others might benefit less. Thus, if the number of admissible mergers is limited, firms may decide to merge to preempt rival mergers. This paper studies the incentives for preemptive merger by firms engaged in spatial competition.     

Should competition authorities care about conglomerate mergers?

Mergers and acquisitions may change competition even when they do not affect market structure, a case known as conglomerate mergers. In this paper, we explore a wave of acquisitions of higher education institutions by educational groups in Brazil, which allows us to disentangle the effects of conglomerate mergers and of horizontal mergers on price, quantity, and quality indicators. Our findings show that multiunit organizations are able to increase some quality indicators. As for the effect on price and quantity, results are different. For conglomerate mergers, we estimated an increase in the number of freshmen and tuition fees, whereas for acquisitions that lead to horizontal concentration there is no increase in quantity, just in prices. Also these effects are larger the smaller the market share of the acquired HEI. On the whole, our findings are consistent with the hypothesis that multiunit operations increase efficiency, but only conglomerate mergers tend to pass those gains on to consumers. Results also indicate that greater caution should be taken in market extension mergers when the acquired firm has a clear dominant position.     

Multihospital Chain Acquisitions and Competition in Local Health Care Markets

This paper examines the determinants of multi-hospital acquisitions in California during a period of increased competition, 1984–1993. Evidence is examined for differences by chain type in acquisition preferences in the face of increased competitive pressure. Significant differences are found among chain types (for-profit, non-profit, and church). All three types appear to position themselves through acquisitions to obtain multiple-hospital holdings within local markets, with the non-profit type exhibiting the greatest tendency. Such positioning may enhance efficiency in payor contracting and increase market power, lowering competition in the long run.     

Multimarket Contact in Health Insurance: Evidence from Medicare Advantage*

Many industries consist of large firms that compete in multiple geographic markets. Such overlap, defined as multimarket contact (MMC), may facilitate tacit collusion and soften competition. We examine the effects of MMC on health insurance prices and quality using comprehensive data on the Medicare Advantage (MA) market from 2008 through 2015. Our identification strategy exploits two plausibly exogenous changes to MMC: (1) out-of-market mergers; and (2) policy-driven changes in the benchmark rates of other markets. Our results consistently support the mutual forbearance hypothesis, where we find that prices are significantly higher and high-quality plans less pervasive as MMC increases.     

Applying “Merger Guidelines” market definition to (de)regulatory policy: Pros and cons

Since initially presented in the 1982 Department of Justice Horizontal Merger Guidelines, market definition has been adopted nearly worldwide as a framework to see if a merger would substantially lessen competition. This framework is useful for addressing the similarly counterfactual question of whether forbearance from regulation would lead to an increase in prices. In this context, however, the usefulness of a merger-based market definition is limited. Because the alternative to forbearance is regulation, and since some regulated rates may be below competitive levels, finding that deregulation would lead to market power as defined for mergers need not justify continued regulation. Forbearance in telecommunications highlights market definition questions regarding gross vs. marginal substitutes, dynamic efficiencies, and service bundling. It also reveals ambiguities in the meaning of “geographic market.” Market definition also has limited applicability if regulation exists not to prevent high prices but the abuse of dominance through predatory pricing.     

The Role of Hospital and Market Characteristics in Invasive Cardiac Service Diffusion

Little is known about how the adoption and diffusion of medical innovation is related to and influenced by market characteristics such as competition. The particular complications that are involved in investigating these relationships in the health care sector may explain the dearth of research. We examine three invasive cardiac services: diagnostic angiography, percutaneous coronary interventions, and coronary artery bypass grafting. We document the relationship between the adoption by hospitals of these three invasive cardiac services and the characteristics of the hospitals, their markets, and the interactions among them, from 1997 to 2014. The results show that the probability of hospitals’ adopting a new cardiac service depends on competition in two distinct ways: (1) hospitals are substantially more likely to adopt an invasive cardiac service if competitor hospitals also adopt new services; and (2) hospitals are less likely to adopt a new service if a larger fraction of the nearby population already has geographic access to the service at a nearby hospital. The first effect is stronger, leading to the net effect that hospitals duplicate rather than expand access to care. In addition, for-profit hospitals are considerably more likely to adopt these cardiac services than are either nonprofit or government-owned hospitals. Nonprofit hospitals in high-penetration, for-profit markets are also more likely to adopt them relative to other nonprofits. These results suggest that factors other than medical need—such as a medical arms race—partially explain technological adoption.     

Competition and the performance of hospital markets

This paper explores the relationship between competition and market performance for the primarily nonprofit industry, hospital services. A theoretical framework is adopted that assumes hospitals compete for physician affiliations on the basis of hospital price and resources provided. The model indicates that monopoly power leads to higher quality-adjusted hospital prices, resulting in a reduction in the level of hospital resources consumed. This reduction can occur through admissions, patient length of stay, or resources consumed per patient-day. A regression analysis reveals that all three are reduced as market concentration increases.     

Endogenous Mergers of Complements with Mixed Bundling

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner firms decrease the price of the bundled system. In addition, when markets for individual components are sufficiently important, partner firms find it strategically advantageous to raise the prices of stand-alone products, thus making substitute ‘mix-and-match’ composite products less attractive to consumers. Even though these effects favor the profitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers that are observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important).     

Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.     

Digging Deep to Compete: Vertical Integration,Product Market Competition and Prices

This article establishes a causal effect of product market competition on vertical integration. I exploit a hitherto unexplored natural experiment in the U.S. coal mining industry and a unique mine‐level organizational data set. Following an exogenous increase in product market competition, the incidence of vertical integration fell by 33% within the treatment group relative to the counterfactual. I find novel evidence that transition to the lower degree of vertical integration is driven by competition's reducing market prices by 32% which decreased the incentive to conduct vertical mergers. I discuss several possible interpretations of these changes.     

25 years of European merger control

We study the determinants of common European merger policy over its first 25 years, from 1990 to 2014. Using a novel dataset at the level of the relevant antitrust markets and containing all relevant merger cases notified to the European Commission, we evaluate how consistently arguments related to structural market parameters – dominance, rising concentration, barriers to entry, and foreclosure – were applied over time and across different geographic market definitions. On average, linear probability models overestimate the effects of structural indicators. Using non-parametric machine learning techniques, we find that dominance is positively correlated with competitive concerns, especially in markets with a substantial increase in post-merger concentration and in complex mergers. Yet, its importance decreased following the 2004 merger policy reform. Competitive concerns are also correlated with rising concentration, especially if entry barriers and foreclosure are of concern. The impact of these structural indicators in explaining competitive concerns is independent of the geographic market definition and does not change over time.     

审计市场中的合并、产业专用化投资和价格竞争

本文从产业组织的角度，分析了审计市场的合并、产业专用化和价格竞争等竞争行为，并进一步探讨了这些行为对审计质量和社会福利的影响。本文认为，审计质量的信号传递机制推动了产业中的合并行为，而审计产业的专用化投资行为在于策略性地阻止进入。由于审计产品的异质性、信任品特性以及强大的买方谈判能力使得审计市场存在激烈的价格竞争，而合并和产业专用化投资有助于事务所降低成本。因而，审计市场的竞争提高了社会福利。     

Market Structure and Market Performance

I review studies of the determinants of market performance in the aircraft, passenger airline, supermarket, liner shipping, and hospital industries, and of mergers and market performance in markets for fast food, soft drinks, and retail gasoline. Common factors are that more competitive market structures accompany better market performance, and that firm conduct and industry-specific factors play independent roles.     

Are OTT messaging and mobile telecommunication an interrelated market? An empirical analysis

OTT messengers such as Facebook and WhatsApp have gained wide popularity among mobile users while the traffic of text messaging is in strong decline. As such, there is a debate over whether both services are interrelated and constitute a joint product market, which has important implications for the current wave of mergers in the mobile industry and regulation policy. To the best of our knowledge, this work is the first to provide an empirical analysis of how the consumption of OTT messengers affects demand for text messaging and mobile voice services. We make use of an innovative dataset which includes very detailed information on smartphone usage in Norway and consider a novel approach to address this question which is embedded in the complexity of two-sided markets. Interestingly, our findings suggest that OTT messengers complement demand for traditional mobile telecommunication services for this context. Consequently, both markets are interrelated but do not constitute a joint market from the perspective of competition policy in Norway. Moreover, we find an explanation for why reductions of text messaging usage have been so drastic in some countries and an analogous development for mobile voice is rather unlikely. Finally, our empirical results provide a new perspective on the modelling of consumer utility in communication networks in the theoretical literature.     

Vertical Integration in International Telecommunication System

The process of liberalization and privatization is drastically altering the links among international telecommunications carriers. The model presented in this paper analyses the international telecommunications market illustrating the effects of vertical mergers, under symbiotic production conditions, when vertically integrated and unintegrated carriers coexist. The effect of competition is analysed both in the final market and in the intermediate one where carriers compete over tariffs to get an appropriate distribution of profits. In particular, the results show the relations between final market prices, intermediate tariffs and market dimensions and their implications on profits.     

国际油田服务公司一体化发展的经验和启示

油田服务行业的一体化服务模式是通过强化公司资源的集中统一调配和管理,以综合项目管理为导向,增强油气勘探生产活动各环节技术服务业务的紧密性,为石油公司提供“一站式”服务和综合性解决方案.油服公司运作一体化服务需要具备六个要素.全球油服领域“三巨头”(斯伦贝谢、哈里伯顿、贝克休斯)发展一体化服务能力的经验表明:先进的理念与完善的组织机构是发展一体化服务的基础;技术研发和信息系统是实施一体化服务的有效保障;收购兼并与业务重组是扩展服务领域和快速提升服务能力的重要手段;战略联盟作为新型合作模式可加速一体化服务模式的发展.与国外油服公司相比,中国油服公司的一体化服务能力略显不足.提高一体化服务能力,需要加大投入,提高技术创新能力;引进人才,培养开发复合型人才;组织保障,以战略目标考核作引导;适时兼并,跨越式扩大规模;发挥比较优势,积极参与国际竞争.