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. ______________________________________________________ Corresponding Author: [email protected]. We are grateful to the Editor, Aviv Nevo, and two anonymous referees for suggestions that substantially improved the paper. Thanks are due to Rein Halbersma, R. Forrest McCluer, and Misja Mikkers for their comments and suggestions and Rob Jones for his computing assistance. We are grateful to Barry Harris for generously assisting us in replicating Critical Loss Analysis as used in practice in hospital antitrust cases, and to Cory Capps for generously assisting us with estimating the Option Demand model. All errors and opinions are the sole responsibility of the authors.