David J. Balan

A Critique of the “Learning about Demand” Defense in Retrospective Merger Cases

David J. Balan et al. — Wed, 27 Apr 2011 16:21:03 PDT

A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare

Patrick S. Romano et al. — Fri, 15 Oct 2010 13:19:42 PDT

In 2004, the Federal Trade Commission brought a legal action retrospectively challenging the 2000 acquisition of Highland Park Hospital by Evanston Northwestern Healthcare in Evanston, Illinois. A major issue in that case was whether the merger had resulted in improved clinical quality at Highland Park. In this paper, we describe the conceptual framework that guided our analysis of that issue and we report our findings. Specifically, we examine numerous quantitative measures of clinical quality. We find little evidence that the merger improved quality. We also discuss the applicability of our framework to the prospective analysis of unconsummated hospital mergers.

Better Product at Same Cost, Lower Sales and Lower Welfare

David J. Balan et al. — Fri, 15 Oct 2010 12:46:11 PDT

We analyze the effect of product quality on the output of a high-quality dominant firm facing a low-quality competitive fringe. Using a standard vertical differentiation model, we show that profit maximizing output decreases with product quality when the dominant firm's marginal cost is lower than that of the fringe, is independent of quality when marginal cost is the same for all firms, and is increasing in quality when the dominant firm's marginal cost is higher than that of the fringe. The driving force behind this result is that an increase in product quality does not cause a parallel shift in the dominant firm's residual demand, but rather causes it to pivot. This, in turn, causes the dominant firm's marginal revenue curve to rotate, rather than shift outwards, resulting in inwards movement around the equilibrium output when the dominant firm's marginal cost is lower than the fringe's. Equally strikingly, higher quality at the original marginal cost may result in all consumers being weakly worse off, with some being strictly worse off. Similar results can be obtained without a competitive fringe, but only under some more restrictive conditions.

Simulating Hospital Merger Simulations

David J. Balan et al. — Wed, 18 Feb 2009 17:03:19 PST

In recent years, researchers have developed a number of new methods for predicting the price effects of hospital mergers. Though there are several variants, the basic steps are the same. First estimate a discrete choice model of hospital choices; then use these estimates to generate a hospital-level measure of market power (a large part of the innovation was in creating new market power measures that have certain attractive properties); and then use the market power measure as an independent variable in a hospital price regression. Finally, use the estimated relationship between the market power measure and price to simulate the effects of mergers. In this paper, we seek to test the accuracy of these simulation methods. To do this, we set up a simple model of hospital competition which can, for any given values of the parameters of the model, generate the “true” effects of a merger between any two hospitals. These “true” effects are then compared to the effects predicted by the simulation methods described above. We repeat this exercise 32,400 times and, using each of several market power measures, derive results regarding the conditions under which the simulation method does or does not generate predicted effects that are close to the “truth.” Our preliminary results suggest that the simulation methods slightly under-predict merger effects on average, and that this under-prediction becomes more pronounced as the diversion between the merging hospitals increases.

Job Insecurity isn't Always Efficient

David J. Balan et al. — Mon, 09 Jun 2008 13:43:59 PDT

Workers value job security. If at least some workers value it enough, then it is efficient for at least some firms to adopt policies in which they commit (implicitly or explicitly) not to dismiss employees except for “just-cause,” as opposed to policies in which employers are free to dismiss employees “at-will.” In this paper, we develop a simple model in which the equilibrium distribution of workers between just-cause firms and at-will firms is not generally efficient: there can be inefficiently many workers in just-cause firms or inefficiently few. If there are inefficiently few, then a tax or even a ban on at-will firms can be welfare-improving. We also show results regarding the distributional effects of such policies, and their likely political support.

Collusion and the "Old Boys Club"

David J. Balan et al. — Mon, 09 Jun 2008 12:50:42 PDT

This paper begins with the assumption that collusion can be sustained by means of sincere group loyalty among members of a cartel, and that such loyalty can be inculcated into others. We show that inculcating loyalty into potential entrants can increase profits for both the incumbents and for the (loyal) entrants, particularly if the experiences that serve to inculcate loyalty also bestow valuable industry-specific human capital on the recipient. This can allow the incumbents to blockade non-loyal entry and can also allow incumbents to profitably expand the cartel even absent an entry threat. It appears that, in the presence of genuine loyalty, activities that are typically associated with an “Old Boys Club” can increase collusive profits.

I'm as Mad as Hell and I'm Not Going to Take This Anymore: On Indignation and Health Care

David J. Balan — Mon, 09 Jun 2008 12:46:32 PDT

This paper begins with the idea that patients become “indignant” when they are denied care at their preferred provider, even if the denial is justified under the patient’s insurance policy, and consequently take actions that impose costs upon their insurers or employers. I develop a simple model to explore the effects of such patient indignation on provider prices and profits, as well as on the number of uninsured, total social welfare, and consumer welfare.

Ideological Persuasion in the Media

David J. Balan et al. — Mon, 09 Jun 2008 12:42:31 PDT

Media outlet owners can modify their outlet’s content so as to persuade audiences to adopt positions consistent with their preferred ideologies. In this paper, we assume that outlet owners value such persuasion, and therefore will engage in it at the cost of some reduction in profits. We compare the level and diversity of persuasion that occur under two regimes: one in which common ownership of media outlets is prohibited and the other in which it is permitted. We show that mergers between outlets whose owners have identical ideologies increase the level of persuasion, and mergers between outlets whose owners have different ideologies can increase or decrease the level of persuasion. We also show that unrestricted market competition does not necessarily generate diversity, that prohibiting monopoly control over the media does not guarantee diversity, and that, while rules prohibiting monopolization can sometimes promote diversity, in some circumstances these rules can also reduce diversity. This can occur because potential owners care about who will acquire an outlet if they do not.

The Correlation between Human Capital and Morality and its Effect on Economic Performance: Theory and Evidence

David J. Balan et al. — Mon, 09 Jun 2008 12:29:15 PDT

We incorporate morality--defined as lower utility from consuming goods obtained through appropriative rather than productive activities--into a simple static general equilibrium model in which agents choose whether to be producers or to be appropriators. We analyze the relationship between the correlation between morality and human capital on the one hand and aggregate economic performance on the other. We show that there is a main effect that tends to cause this relationship to be positive, and that there can be secondary effects that can either reinforce or oppose (or even overbalance) the main effect. We test the theory using the World Values Survey as a source of proxies for morality, borrowing the regression framework of Rodrik, Subramanian and Trebbi (2004). Using our preferred proxy, we find evidence that higher within-country correlation between morality and ability, holding constant the levels of morality and ability, increases per-capita income levels. Under our preferred specification, a one-standard-deviation increase in the correlation between morality and ability raises the log of per-capita income by about one-fourth of a standard deviation, equal to approximately $3600 for the median income country in our sample. Results are robust to correcting for endogeneity and to changes in sample and specification. Results are mixed when we use alternative morality proxies, but the coefficient on the morality-ability correlation is still usually positive and statistically significant.