Rough Draft: Not for Citation or Quotation a Competition Index for Differentiated Products Oligopoly with an Application to Hospital Markets

We develop a competition index for differentiated products oligopoly and apply it to assessing the impact of concentration on price in hospital markets in California. Our index, which we term LOCI, is bounded between zero and one and increases with the competitiveness of a market. We use 1992-1995 hospital data from California to estimate the impact of concentration on price using our new concentration measure. We find that on average, hospital prices decrease significantly as markets are more competitive. A hypothetical merger that decreases the number of firms from 3 to 2 leads to a price increase of $800, or 16%. The estimated average demand elasticity for hospital services is −3.55. Government hospitals face a less elastic demand of −3.14 than all ownership types. Demand elasticity for for-profit and not-for-profit hospitals are −4.5 and −3.25 respectively.