Bargaining in Bilateral Oligopolies with Application to the Health Sector

University Of Arizona, Tucson AZ

Investigators

Abstract

In the hospital sector, prices are generally negotiated by hospitals and insurers rather than set by one side or determined by means of an auction. One of the ways that firms may achieve a better bargaining position is through a horizontal merger. This proposal develops theoretical and empirical models of competition for bilateral oligopolies such as the one described above. The proposal then shows how to use these models to better understand the nature of competition in the health care sector, as well as to examine the impact of counterfactual mergers and policy remedies in this sector. The approach is also useful to evaluate the impact of mergers and competition in other industries where prices are determined by negotiation between differentiated sellers and a small numbers of gatekeeper buyers. In addition, the proposal further develops the theoretical underpinnings for bilateral oligopoly bargaining models. This proposed project has two significant intellectual merits. First, it contributes to the empirical literature on bargaining models, by developing new methods to analyze competition in sectors with small numbers of firms on both sides of the market and using the methods to evaluate the impact of mergers and other counterfactual policies. The research extends the standard applied modeling framework for mergers to settings where prices are determined through bilateral negotiation. The methods are applied to the health care industry, demonstrating their applicability and use in an important empirical setting. Second, the proposed project contributes to the theoretical literature on bargaining between multiple agents by evaluating conditions under which simple solutions can be generated as the unique equilibrium of a simultaneous alternating offers game. Thus, this project provides guidance on when the use of these solutions is appropriate. In many important sectors of the economy, prices are determined by negotiation between different parties rather than by being set unilaterally by one side of the market. Understanding the impact of competition and mergers in these sectors is important from a policy perspective. This proposal develops empirical and theoretical methodology to examine these industries. The hospital industry has been the subject of more antitrust trials than any other sector over the past 25 years, and the proposal specializes in models for this sector. Thus, this proposal has the ability to influence antitrust policy and more broadly, our understanding of the nature of competition in industries with negotiated prices.