Cory S. Capps,
David Dranove,
Shane Greenstein, and Mark Satterthwaite
Abstract
During the 1990s, hundreds of mergers consolidated
the hospital industry. In principle, several purposes motivated
this consolidation. First, consolidation might have facilitated
the elimination of excessive beds and services. Second, if hospitals
consolidate, they can limit the ability of managed care organizations
to steer patients, and they can resist demands for discounts.
Despite their potential to enhance market power, the Federal Trade
Commission and Department of Justice have challenged only a handful
of hospital mergers. In all but one case, the definition of the
relevant geographic market played a key role in the outcome. In
all cases, courts have determined geographic boundaries by using
an approach for geographic market definition first advocated in
Elzinga and Hogarty.
Both the standard merger guidelines and the hospital-specific
guidelines advocate using the small but significant non-transitory
increase in price (SSNIP) criterion. We have investigated whether
inferences using Elzinga-Hogerty analysis get close to the inferences
using the ideal SSNIP criterion. We propose three alternative
but related methodol-ogies for doing so. We find that mergers
that might easily pass muster using Elzinga-Hogerty may easily
fail using the SSNIP criterion. We surmise that Elzinga-Hogerty
provides a highly inaccurate view of the appropriate market boundaries
over a wide range of plausible situations. Hence, we advocate
eliminating the use of the Elzinga-Hogerty criterion in any situation
where their inferences are ambiguous, which is, practically speaking,
in all courtroom proceedings.
A corrected and final version of this article appears in the Winter
2002 issue of The Antitrust Bulletin.
Cory S.
Capps, Kellogg School of Management,
Northwestern University David Dranove, Kellogg
School of Management, Northwestern University Shane Greenstein,
Kellogg School of Management, Northwestern University Mark Satterthwaite,
Kellogg School of Management, Northwestern University
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