Essays in Empirical Industrial Organization

Sebastian Linde, Purdue University


Hidden Costs and Inflated Prices Exploring the Cost of Becoming Informed and the Role of Bargaining Power for Uninsured Patients within the U.S. Health Care System The following paper studies the payment problem faced by uninsured patients within the U.S. health care system in order to learn about the determinants of chargemaster prices. A simple hybrid pricing model (one that allows patients to negotiate down prices) is formalized that allows for the study of the relation between chargemaster (list) prices, patients' cost of becoming informed, and the degree of power disparity between patients and providers in billing negotiations. Using patient payment data for office-based provider visits collected from the MEPS (2002-2012), I find that patients are on average willing to pay $456 for their visit (which is above what they are commonly charged), have a bargaining power of 0.41 (which is lower than that of the provider), and that they face a substantial bargaining cost, on average $109. A counterfactual exercise shows that policies aimed at reducing the patients' bargaining cost and improving his/her bargaining position can help move the equilibrium outcome towards one where list prices are lower and welfare is increased. As such, this paper presents bargaining cost and power of uninsured patients as channels that appear to importantly contribute towards the high prices (and welfare inefficiency) of the U.S. health care system. Do Mergers Among Multimarket Firms Create Value? (with Ralph Siebert) Merger value is frequently evaluated in single market contexts without considering possible gains stemming from firms' multimarket presence. This study concentrates on the question through which channels, and of which magnitude, mergers among multimarket firms create incremental value. We establish a simple theoretical model that determines merger value in a multimarket firm environment. The model enables us to derive merger values as being independent of post-merger market shares, but rather dependent on pre-merger market shares. We test our hypotheses using a comprehensive dataset that encompasses information on mergers and firm-level multimarket production and innovation within the semiconductor industry. Using the pairwise stable equilibrium concept, we estimate firms' structural value functions. Our results show that multimarket effects contribute, on average, 20% of the total merger value added. Moreover, we find that multimarket efficiency gains dominate multimarket power effects by contributing majority of the value added. We also find that our estimated merger values are well aligned with the merging firms' post-merger stock market performance. Hospital Efficiency: a Factor Model Approach The use of stochastic frontier models for inference on hospital efficiency is complicated by heterogeneity across both outputs and factor inputs. The inability to fully control for this heterogeneity, and for the potential existence of cross-sectional dependence due to the presence of unobserved common factors, leads to endogeneity problems that can bias both cost function and efficiency estimates. Using a panel consisting of 1518 hospitals, for the years 1996–2013 (T=18), I adopt recent techniques for dealing with long, cross-sectionally dependent panel data in order to estimate cost parameters and hospital specific efficiency. In particular, I employ the estimation technique proposed by Bai (2009), which assumes that the unobservable heterogenous effects have a factor structure. The factor model is flexible enough to nest many traditional stochastic frontier model specifications, while simultaneously ameliorating heterogeneity bias in both the cost function, and the efficiency, estimates. The latter is achieved by separating out unobserved hospital heterogeneity in quality (of care) from inefficiency. Interestingly, I find that hospital cost inefficiencies have been increasing during the period of 1996-2013, and that the growth in inefficiency is driven by spending that increases patient satisfaction, but that does not necessarily contribute to better quality of care or to improved patient outcomes.




Siebert, Purdue University.

Subject Area

Economics|Organization Theory|Health care management

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