University of South Carolina, Norman J. Arnold School of Public Health, Dept. of Health Administration, HADM J712 November 21, 2000
Copyright © 1999-2000 Samuel L. Baker
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Monopoly and Antitrust

Monopoly and Competition Theory Sound applet

"Monopoly" means one seller. It comes from Greek words meaning one (mono) seller (polein, which is Anglicized to "poly"). The term is used broadly to include industries of several sellers who act as one.

The correct term for a "buyers' monopoly," where there is only one buyer, is "monopsony."

Sound applet "Oligopoly" means a small number of sellers. The automobile industry is an example of an oligopoly. So is the hospital services industry in most medium to large cities.

Structure, Conduct, and Performance Sound applet

Economists analyze a market under three categories: Structure, Conduct, and Performance. Structure is the context in which the actors in the market make their decisions. Conduct is what decisions the actors make. Performance is what we get as a result in terms of efficiency and equity.

Structure Sound applet includes:

Conduct Sound applet includes: Performance Sound applet includes: Sound applet Monopoly, oligopoly, and perfect competition are different types of market structure, representing different amounts of market concentration. Monopoly is complete concentration. Perfect competition is no concentration. Oligopoly is in between.

Sound applet Structure determines whether conduct matters. Conduct doesn't matter in a perfectly competitive market, because any firm that doesn't minimize cost and keep its price low is out of business. Conduct matters considerably in monopolized markets. The monopolist may or may not take advantage of its position. Conduct is most complex in oligopoly markets. Conduct determines whether an oligopoly acts like a monopoly, like competition, or like something else that conforms to neither of those models.

Sound applet Industries may be natural monopolies, if it is most efficient to have one seller serve an entire market. Local utility service may be an example, because it would be costly to have two sets of water pipes, electrical lines, or telephone lines to each house.

Industries may be natural oligopolies, if there are economies of scale (larger size is less costly) to the point that the minimum efficient size firm is a substantial portion of the market. In automobiles, for example, minimum efficient sizes are large enough that it is doubtful that there could be more than a dozen or so automobile companies world-wide, if you exclude high-priced specialty cars.

What monopolies do (that we don't like) Sound applet

Antitrust Laws Sound applet

Laws against monopolies in the United States are the Sherman Act of 1890 and the Clayton and Federal Trade Commission Acts of 1914.

The Sherman Act of 1890 makes it illegal to "monopolize, or attempt to monopolize, ... any ... trade or commerce..." This law is aimed at market structure. The U.S. Justice Department has the responsibility for enforcing this law.

Sound applet The Clayton and Federal Trade Commission Acts of 1914 prohibit monopolistic mergers and certain other forms of anti-competitive behavior. These laws are aimed more at conduct. The Federal Trade Commission was established by this legislation to enforce this law. That's why we have two government agencies, Justice and FTC, involved in antitrust law enforcement. So, for example, it was the FTC that required Columbia/HCA to sell its Aiken hospital when it acquired a hospital in Augusta. More recently, the Justice Department sued two hospitals in Dubuque, Iowa, that were merging to form a local monopoly.

Sound applet The term "antitrust," which labels anti-monopoly laws, comes from the 1880's. The "trust" was a specific form of corporate organization used by Standard Oil as it grew by merger towards being a national oil refining monopoly. Stockholders in corporations joining Standard Oil gave their shares of stock to Standard Oil. In return they got trust certificates giving them part ownership of Standard Oil. State courts declared this arrangement illegal under then-existing corporation law. Standard Oil might have had to break up, but New Jersey came to its rescue by legalizing the holding company. This allowed New Jersey corporations to own shares in other corporations. (Today, every state allows this.) Standard Oil dumped the trust form of organization, moved its corporate headquarters to New Jersey, and became a holding company. Nevertheless, the press applied the term "trust" to all large firms that were attempting to monopolize their markets, and the term has stuck to this day to laws against "trusts."

The Concentration Ratio Sound applet

The concentration ratio is the portion of the market controlled by the top X number of firms. You choose the X. Pretty straightforward, if you have market share data.
Concentration ratio example
This table shows the general hospitals in Richland and Lexington counties in South Carolina in 1995. I'm using the number of in-patient beds in each hospital as a measure of its size. The "s" column shows the market share, each hospital's proportion of all beds in the market, which I am defining as Richland and Lexington counties. (Bed count is not the best measure of market share, because occupancy rates differed. Let's ignore that for now.)

The top-2 concentration ratio before the merger was 0.68, obtained by adding the "s" numbers for the two largest hospitals.

The Herfindahl-Hirschman Index (HHI) Sound applet

The HHI is an alternative to the concentration ratio as a way to get a number representing how monopolistic a market is.

The HHI, the Herfindahl-Hirschman Index of market concentration, is the sum of the squares of the market shares of all the firms in the market. This means it ranges from 0 to 1. An HHI near 0 indicate that no firms are large relative to the market, a competitive structure. An HHI of 1 would mean there is just one firm in the market, a monopoly structure.

Here is the HHI formula:

In this formula, there are N firms.  s is the particular firm's market share, which is that firm's sales divided by total market sales.  Each firm's s is squared and then all are added up.  A market with just one firm would have an HHI of 1.  A market with two firms of equal size would have an HHI of (0.5)x(0.5) + (0.5)x(0.5) = 0.5.

The HHI is used in Vistnes, G., "Hospital Mergers and Antitrust Enforcement," Journal of Health Politics, Policy, and Law, Spring 1995, 20(1), pp. 175-190. In that article (not in the packet), a Justice Department official explains how they decide which hospital mergers to fight. The article is a response to another in the same journal, that claims there is no rhyme or reason to Justice Department policy. Vistnes says that antitrust enforcement is a judgement call based on how likely the merger is to hurt consumers by allowing the firms to raise prices. This judgement can't be reduced to a formula, he says. Nevertheless, he does present a formula, the HHI.

Vistnes's Table 1 lists several recent mergers, and calculates the HHI for each. The HHI's are all multiplied by 10,000 to get rid of the decimal point. The Dubuque, Iowa, merger would have left just one hospital organization in the Dubuque metropolitan statistical area, so Vistnes gives it a 10,000. The Reading, PA, merger would have left that city with two hospitals of about equal size, so the HHI is about 5000. Augusta, GA, is also listed in Vistnes's Table 1. When Columbia/HCA acquired the former Humana hospitals, the FTC forced Columbia/HCA to sell its Aiken hospital, to reduce market concentration in the area hospital services market.

Palmetto Health Alliance merger

Sound applet
If we calculate an HHI for Columbia, SC, based on authorized beds, we can show the effect of the merger that formed the Palmetto Health Alliance from Richland and Baptist Hospitals. Before the merger, the HHI was .29. After, it was .51.

Key ideas in Vistnes are on page 181. Notice how the price elasticity idea is used to determine the borders of product and geographic markets (though the term "elasticity" is not used).

More comments on the Palmetto Health Alliance's market share: Sound applet

Certificate of Public Advantage (COPA) Sound applet

McKnew, N.M., Miller, S.L.W., "The Health Care Cooperation Act:  Panacea or Peril?" South Carolina Law Review, 1996, 47, pp. 615-628.
The Palmetto Health Alliance merger between Richland and Baptist is proceeding under the cover of a COPA, a Certificate of Public Advantage. This was issued by DHEC, under authority granted by the Health Care Cooperation Act. The same DHEC office that does Certificates of Need (permission to add hospital beds or major equipment) does COPAs, but a COPA differs from a CON in an important way: A CON, once granted, is good forever. No recertification is required for a certificate of need.

Sound applet By contrast a COPA must be actively enforced through ongoing regulation that continues indefinitely. Otherwise, a Federal court might find that the COPA was not being strictly enough enforced to provide immunity from Federal antitrust action.  Hospitals "will be forced to monitor and even encourage active state participation as a security measure against antitrust liability." The authors are concerned that DHEC got no budget to do COPAs. What happened in practice was, as the authors anticipated, that the hospitals are financing their own regulation, by giving DHEC money that pays for independent audits.

Kuttner, R., "Physician-Operated Networks and the New Antitrust Guidelines," N Engl J Med, Jan. 30, 1997, 336(5), pp. 386-391. Sound applet

Antitrust lawsuits in the 1970s broke the power of the medical societies to prevent doctors from joining HMOs. Some state medical societies had ruled that working for an HMO was unethical behavior for a doctor. Their defense against antitrust was that medicine was a profession, not trade or commerce. The Supreme Court ruled that medicine is trade and subject to antitrust laws, forcing medical and dental societies to change their codes of ethics.

In some localities doctors tried to counter HMOs by forming HMO's that they ran, generally using the IPA model. In a 1982 case called Maricopa, the court ruled that a doctor-run IPA which signed up 70% of the doctors in Maricopa County, Arizona, was a cartel. (A cartel is a price-fixing agreement. OPEC is a cartel. Evidence presented showed that the doctors really were trying to stop HMOs from penetrating their local market.) The Justice Department did not, however, try to stop similarly large IPA's that were not doctor-run. For example, the Physicians Health Plan IPA signed up two-thirds of Columbia, South Carolina, doctors in the mid-1980's. The government did not sue. Through the 1980's and early 1990's, the antitrust enforcers (Justice Dept. and FTC) have treated IPA's not run by doctors more liberally than doctor-run IPA's. The AMA tried to get the Congress to change that, but failed.

In the mid-1990's, the Justice Dept. and the FTC issued new guidelines to treat all kinds of IPAs the same. Kuttner comments that doctors may find, though, that setting up an IPA to compete with the managed care companies may be expensive. (Indeed, the original Physicians Health Plan in Columbia collapsed spectacularly, leaving millions in unpaid bills. PHP was losing about $10 per member per month. Today's PHP, by the way, is completely reorganized.)
In passing, Kuttner explains the distinction between the per se rule and the rule of reason:

Kuttner finishes by criticizing those who argue that the only difference between medicine and other businesses is that doctors used to control it.



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E-mail: sam.baker@sc.edu