Concentration and Pricing in the Hospital Sector

The pricing behavior of non-profit hospitals is an important issue given the size of the non-profit hospital sector in relation to the for-profit sector. It is generally accepted in the literature that for-profit hospitals set higher prices than their non-profit counterparts. However, there is disagreement over the relative behavior of the different types of hospital in the presence of market power. Some authors argue that market power causes hospitals to maintain higher prices regardless of their ownership, while others argue that greater levels of market power are associated with lower prices for non-profit hospitals. Clearly, how market concentration influences the pricing behavior of non-profits has implications for antitrust policy and is an interesting topic for research. This paper reviews the previous research that identifies the effects of market power on the behavior of hospitals under different forms of control. It then offers a new investigation of the issues using data from a sample of patients suffering from alcohol and drug related disorders. These data have a distinct advantage over those used in previous research in that they examine a more standardized area of treatment and provide more direct control for severity of illness than those used by previous authors. In addition, the model used in this paper avoids some of the specification issues inherent in some of the prior research. ∗ I would like to thank Professor Lawrence J. White (Stern School of Business, New York University) for his consistent and insightful guidance in writing this paper. I would also like to thank Professors William Greene, Richard Sylla and Richard Brief for their thoughtful comments and suggestions. This paper is extracted from my Ph.D. dissertation, “Essays in the Economic Behavior of Hospitals”, at the Stern School of Business, New York University.