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Competition and Market Power in Option Demand Markets

Cory Capps, David Dranove and Mark Satterthwaite
The RAND Journal of Economics
Vol. 34, No. 4 (Winter, 2003), pp. 737-763
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/1593786
Page Count: 27
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Competition and Market Power in Option Demand Markets
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Abstract

We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets." In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each supplier's market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the supplier's inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego.

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