The welfare effects of mergers in the hospital industry

This paper presents a model of competition among hospitals, each of which competes in the provision of product quality. It examines whether mergers by hospitals enhance social welfare. The conclusion is that such mergers may be desirable, as they may mitigate the overutilization externality. Conditions determining the welfare impact of a merger are derived. We show that whether mergers are desirable depends on whether the hospitals maximize profits or output; on the welfare criterion used (consumers' surplus, consumers' plus insurers' surplus, or total surplus); and on key parameters of the model such as the consumer co-payment rate.