Competition and Market Power in Option Demand Markets

Abstract

We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets." In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each supplier's market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the supplier's inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego.

Assessing hospital competition when prices don’t matter to patients: the use of time-elasticities

“…Models specifically designed to estimate the value consumers place on different provider networks(Town and Vistnes 2001;Capps et al 2003) do therefore not accurately depict markets for health care in European countries. Switzerland may be an exception, since there integrated insurer-provider organisations have a significant and increasing market share.…”

Market power and provider consolidation in physician markets

“…In these studies, patient choice and firm behavior is explicitly modeled and estimated using econometric techniques. Models developed by Town and Vistnes (2001), Capps et al (2003), and Gaynor and Vogt (2003) were among the initial studies to analyze market power in the hospital industry using microdata collected from hospital discharge records. In these studies, patient preferences for hospital care are directly estimated and these estimates are then related to the prices charged by hospitals.…”

“…In these studies, patient preferences for hospital care are directly estimated and these estimates are then related to the prices charged by hospitals. Town and Vistnes (2001) and Capps et al (2003) integrate into their framework the unique role of intermediation by payers on behalf of patients in the health care markets, explicitly recognizing the health-care-specific setting in which prices are negotiated between managed care organizations and providers in exchange for the inclusion of providers in a network. 2 Recent studies have extended this framework to incorporate a more formal bargaining model between hospitals and insurers.…”

“…With over 1,400 health care mergers and acquisitions consummated between 1994(Kaiser Family Foundation 2005Irving Levin Associates 2007, 2009, the health care sector has been an active area for antitrust enforcement over the past two decades, and a sizable literature has emerged analyzing market power for health care services. Most of these studies have focused on analyzing competition in the hospital industry (Capps et al 2003;Gaynor and Vogt 2003;Town and Vistnes 2001;Gowrisankaran et al 2013) and health insurance industry (Dafny 2010;Starc 2010;Dafny et al 2012;Ericson and Starc 2012). However, despite the fact that physician and clinical services currently account for 20 % of US health care expenditures (Hartman et al 2013), there has been little analysis of physician markets.…”

“…In this study, we make use of private health insurance claims data that include in-network transaction prices paid to physician practices to analyze physician market power within three mid-sized US metropolitan areas. Using a 20 % sample of Medicare Part B beneficiaries, we estimate a model of patient demand for a set of cardiology and ophthalmology practices within these areas, and based on this model, compute the ex-ante Willingness-to-Pay (WTP) for each physician practice using the method developed by Capps et al (2003) for the hospital industry. We then relate these measures to physician practice-level prices for a set of non-facility physician services.…”