**6. Conclusions and policy implications**

This study estimates the effect of changes in hospital competition on risk adjusted measures of hospital outcomes as measured by risk adjusted mortality rates. Using the data from the Office of Statewide Health Planning and Development of the State of California for the period 2003-2007 we find that hospitals that saw higher competitive pressures also experienced greater improvements in health outcomes as measured by mortality statistics following Coronary Artery Bypass Graft (CABG) surgery. Although higher competition in hospital markets may not affect health care prices due to the presence of the third-party payers, it does translate into quality competition and better health outcomes.

A review of health care consolidation trends by Goldberg (1999) indicates that consolidation is likely to continue at a rapid pace. Such consolidation can have a negative effect on health outcomes if it leads to increases in market power. Results of this study show that a decrease in the number of hospitals may not necessarily decrease hospital competition index as measured by HHI. Increases in HHI (i.e. decreases in hospital competition) significantly decrease quality of care as measured by risk adjusted mortality rates. In addition, Dranove and White (1994) estimated a trend beginning in the mid-1980s in which higher hospital competition lowered prices and cost of care. Similar results were found by Gaynor and Haas-Wilson (1999) and Keeler et al. (1999). Mounting empirical evidence leads us to conclude that hospital competition improves quality of care and lowers cost of care and prices, thus improving patient welfare.

Our results imply that overtime both technological improvements and antitrust policies will play a role in determining improvements in hospital quality. Antitrust analysis of the hospital industry should incorporate the potential effects of pro-competitive policies on health outcomes since such policies may in fact save lives.

## **7. References**


**8** 

**Welfare Effects** 

*University of the Basque Country* 

Iñaki Aguirre

*Spain* 

**of Third-Degree Price Discrimination:** 

**Ippolito Meets Schmalensee and Varian** 

Price discrimination under imperfect competition is an important area of economic research,1 and third-degree price discrimination, the most prevalent form of price discrimination, is a major item in any standard treatment of monopoly theory covered in intermediate and advanced microeconomics courses (see, for instance, Pindyck and Rubinfeld, 2008, or Varian, 1992, 2006). Under third-degree price discrimination the seller can charge different prices to consumers belonging to different groups or submarkets. For example, the seller may charge different prices to customers who are separated geographically (the home and the export markets) or that are differentiated by age (senior citizen's discounts), occupation (student discounts), time of purchases (initial equipment and replacement purchases), or by end use (milk for liquid consumption or for further processing). Moving from non-discrimination to discrimination raises the firm's profits, harms consumers in markets where the prices increase and benefits the consumers who face

Understanding the conditions under which the change in social welfare can be signed has concerned economists at least from the earlier work by Pigou (1920) and Robinson (1933). A move from uniform pricing to third-degree price discrimination generates, as will be shown below, two effects:2 firstly, price discrimination causes a misallocation of goods from high to low value users (that is, output is not efficiently distributed to the highest-value end); secondly, price discrimination affects total output. Therefore, since price discrimination is viewed as an inefficient way of distributing a given quantity of output between different consumers or submarkets, a necessary condition for price discrimination to increase social welfare is that it should increase total output.3 In consequence, in order for price

1 See Stole (2007), Armstrong (2008) and Liu and Serfes (2010) for excellent theoretical surveys. See also

3 See, for example, Robinson (1933), Schmalensee (1981), Varian (1985), Schwartz (1990) and more recently Bertoletti (2004). However, when marginal cost varies across markets that result does not

McAfee (2008) for a modern view of price discrimination and for antitrust implications.

2 McAfee (2008) provides a nice explanation of these effects.

maintain (see, Bertoletti, 2009).

lower prices. Consequently, the overall effect on welfare is undetermined.

**1. Introduction** 

Gaynor M, Vogt WB. Antitrust and Competition in Health Care Markets. In *Handbook of Health Economics* 2000 AJ Culyer, Newhouse JP, eds. Amsterdam: Elsevier.

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Goldberg (1999)
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