LDI Research Seminar Series

David Dranove, PhD
Walter J. McNerney Distinguished Professor of Health Industry Management, Professor of Management and Strategy, Kellogg Graduate School of Management

"Structural Approach to Antitrust Analysis in Health Care"

September 20, 2002

12:00 - 1:30 PM
Colonial Penn Center Auditorium

Abstract Biosketch

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Managed care is the dominant organizational form for the delivery of health care today in the United States and is an example of a market with option demand. In option demand markets, intermediaries sell networks of suppliers to consumers who are uncertain about their needs. The key function intermediaries serve is to consolidate demand and exert countervailing market power against suppliers. A supplier grants an intermediary a discount in order to be admitted to its network and to gain access to the consumers who have enrolled in it. This paper proposes a measure of the market power that individual suppliers possess in option demand markets. We call this measure the "willingness to pay" (WTP). Employing the logit model of demand among a discrete set of suppliers we derive a formula for consumers' aggregate WTP to retain a given seller in the network. We validate the WTP measure by considering managed care purchases of hospital services. Using 1991 data on inpatient hospital services in San Diego, California, we find that WTP is highly correlated with hospital profits from managed care. We illustrate three applications of this WTP methodology: (1) a comparison of for-profit and nonprofit exploitation of market power; (2) defining markets for antitrust analysis; and (3) predicting the effects of mergers on prices.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University's Kellogg Graduate School of Management, where he is also Professor of Management and Strategy. He has a Ph.D. in Economics from Stanford University. Professor Dranove's research and teaching focus on problems in industrial organization and business strategy with an emphasis on the health care industry. He has published over seventy research papers, monographs, and book chapters, and is coauthor of the popular textbook The Economics of Strategy. His most recent book is The Economic Evolution of American Health Care: From Marcus Welby to Managed Care, published by the Princeton University Press.

Professor Dranove has received numerous research prizes, including the prestigious John Thompson Prize, awarded by the Association for University Programs in Health Administration in recognition of his contributions to health services research. In addition to being a prolific author and scholar, Professor Dranove regularly consults with leading public and private sector organizations about issues in strategic management and antitrust. He has also held board positions for several organizations in the health care and professional services industries.

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The Leonard Davis Institute of Health Economics.
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