Critical Loss Analysis in Evaluating Mergers

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.

show abstract

“…[]; Danger and Frech []; Frech et al . []; Katz and Shapiro []; Langenfeld and Li []; Varkevisser et al . []; Werden [1981/1990]).…”

Section: Introductionmentioning

confidence: 99%

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

Gaynor

Kleiner

Vogt

2013

The J Industrial Economics

View full text Add to dashboard Cite

show abstract

“…Using the prices and costs of the merging firms shown in Table 1, and assuming that these represent the prices and costs of a hypothetical monopolist, we see that a 1 Examples of the use of critical loss analysis in US and EC merger investigations are presented in Langenfeld and Li (2001), Amelio, et al (2008), andHüschelrath (2009). price increase of 5% would equal $2.50, so that the monopolist would gain $2.50 on each unit still sold, but would lose $50 -$30 = $20 on each unit sale lost. Thus ΔP/P = 5% and M = $20/$50 = 40%.…”

Section: Critical Loss Analysis For Market Definitionmentioning

confidence: 99%

“…First, the Guidelines ask whether a hypothetical monopolist would likely impose a SSNIP -a profit maximization question -whereas the more common practice is to analyze whether the hypothetical monopolist could profitably impose a SSNIP -a break-even analysis. The latter interpretation has the distinct advantage of not requiring the analyst to make assumptions about the shape of the demand curve in the industry (Langenfeld and Li, 2001), but it may affect the conclusion nonetheless.…”

Section: The Ssnipmentioning

confidence: 99%

See 1 more Smart Citation

Three Economist's Tools for Antitrust Analysis: A Non-Technical Introduction

Pittman

2017

SSRN Journal

View full text Add to dashboard Cite

The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past forty years. In younger and developing market economies, competition law itself has a history of twenty to twenty-five years at most -sometimes much less -and economic tools that have proven useful to competition law enforcement in developed market economies in focusing investigations and in assisting decision makers in distinguishing central from secondary issues are inevitably less well understood. This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic.

show abstract

“…'Cellophane fallacy' Using CL to define geographic hospital markets has been widely criticized in the economic literature for several reasons (e.g., Langenfeld and Li, 2001;Katz and Shapiro, 2003;O'Brien and Wickelgren, 2004). Danger and Frech (2001) detail what is perhaps the most important methodological shortcoming of CL analysis: market definition via the CL approach is highly sensitive to the initial degree of market power.…”

Section: Critical Loss Analysismentioning

confidence: 99%

Defining hospital markets for antitrust enforcement: new approaches and their applicability to The Netherlands

Varkevisser

Capps²,

Schut

2008

HEPL

View full text Add to dashboard Cite

Effective antitrust enforcement is of crucial importance for countries with a market-based health care system in which hospitals are expected to compete. Assessing hospital market power--a central issue to competition policy--is, however, complicated because the presence of third party payers and the general unobservability of prices make it difficult to apply the standard methods of market definition. Alternative, less formal methods historically employed in the hospital industry have proven inaccurate; these methods were even called inapplicable in a recent US court decision. In this paper, we discuss the strengths and weaknesses of several new approaches to defining hospital markets that are suggested in the recent economic literature. In particular, we discuss the applicability of the time-elasticity approach, competitor-share approach, and option-demand approach to the recently partly deregulated Dutch hospital market. We conclude that the appropriate approach depends crucially on how health insurers contract with hospitals and how patients select their hospital.

show abstract

Critical Loss Analysis in Evaluating Mergers

Cited by 23 publications

References 0 publications

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

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

Three Economist's Tools for Antitrust Analysis: A Non-Technical Introduction

Defining hospital markets for antitrust enforcement: new approaches and their applicability to The Netherlands

Contact Info

Product

Resources

About