Explain how the relevant product market is typically defined for community hospitals. Why? How is the relevant geographical market defined? Why?
2. Assume there are ten equally sized hospitals in a market area. Calculate the Herfindahl-Hirschman index. Two hospitals in the market area inform the Department of Justice that they wish to merge. According to the current DOJ merger guidelines, will the merger by contested? Explain.
3. What are some possible sources of barriers to entry into the hospital industry? What has the literature concluded about the severity of these barriers?
4. Explain how you might design a statistical test to examine the presence of a certificate-of-need law on hospital care expenditures. What would be your main hypothesis in this experiment? What would be the unit of analysis in your experiment? What variables would you specify on the right-hand side of the estimation equation to act as control variables? What would be your identification strategy to eliminate any concerns about reverse causation or a third variable affecting both the presence of a CON law and hospital care expenditures?
5. In Chapters 11 and 12, survivor analysis was discussed as a test to determine if larger-sized hospitals are more efficient at producing services than smaller-sized ones. If you were to use national data for hospitals based on bed size, discuss how you would set up the experiment to perform this survivor test for the hospital services industry. Now go to your library and locate various issues of Hospital Statistics, which is published by the American Hospital Association and use actual data to complete the analysis. Are larger-sized hospitals more efficient? Explain.
6. According to the text, empirical studies have not uncovered any strong evidence to indicate that cost savings result from a hospital belonging to a multihospital system. Yet, hospitals continue to consolidate and form multihospital systems. Why do you suppose that is the case?
7. Equation 13–3 in the text shows the Dorfman-Steiner condition for the optimal amount of advertising intensity for a monopoly. For a few nonteaching and teaching hospitals in your community, see if you can find data on advertising expenditures, revenues, and the accounting operating margin (i.e., net income/ revenues). Is it true that more profitable hospitals advertise more? Now use Equation 13–3 and those figures to impute the advertising elasticity of demand for those particular hospitals. Does a nonteaching or teaching hospital face a higher advertising elasticity?
8. Given the not-for-profit nature of most hospitals in the United States, do you think advertising and other types of promotion expenditures are warranted from a societal perspective? Explain.
If hospitals rely more on nonprice methods of competition, like advertising, quality, and convenience, hospital prices may become relatively rigid. The net effect of this trend on consumer welfare is uncertain and depends on a variety of considerations, including whether the nonprice methods promote real or illusory gains for consumers.
9. Your roommate is working on a paper for a medical sociology class. You are asked by her if the typical hospital in the United States possesses any market power. How would you respond? Use theory and empirical evidence to support your argument.
Most hospital markets are local in nature and tend to be concentrated. Entry into the hospital industry may be difficult due to the extent of technological specifications required. In addition to high sunk costs, other cost conditions, such as scale economies, learning curve effects, and system affiliation, may serve as barriers to entry.
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