1
$\begingroup$

I was reading about two non-profit hospitals (in the US) merging. Hospital A is large non-profit hospital which controls the market in its local metro area and it is acquiring Hospital B, a smaller hospital in a smaller metro area. Hospital B is part of a larger non-profit national hospital chain (call it Chain C).

Basically, Hospital B is being broken off of Chain C and it is being acquired by Hospital A.

It seems like a very capitalist like move, but there are no share holders to please, which got me thinking...

Question :

  1. What possible market motivations are there for Hospital A to acquire Hospital B?
  2. Likewise, what motivations would Chain C have for getting rid of Hospital B?
$\endgroup$

1 Answer 1

0
$\begingroup$

What possible market motivations are there for Hospital A to acquire Hospital B?

Economies of scale - when economies of scale exist the cost per unit will decrease with scale of production. If economies of scale exist having 1 bigger firm is more efficient than having 2 small firms producing the same output as large one.

Likewise, what motivations would Chain C have for getting rid of Hospital B?

Diseconomies of scale - This would be a situation where 2 smaller firms can produce the same output more efficiently than 1 big firm.

Aren’t the Answers above Contradictory?

Now you might ask yourself if it’s not a contradiction to industry having both diseconomies and economies of scale. Short answer is there is no contradiction.

Perhaps the healthcare industry happens to have complex cost function which has increasing economies of scale over some portion of cost curve (maybe up until you get to the point where you manage 30 hospitals) and after the point diseconomies of scale start to kick in.

Alternatively, the two hospital chains could have heterogenous cost functions. Not every firm is identical, perhaps the firm A believes it has some superior management techniques.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.