The medical care index was 100.6 in 1983 and 201.4 in 1993. Thus, the index rose by (201.4 – 100.6)/100.6 = 100.2 percent. The average annual increase over this period was about 10 percent.Google Scholar

The CPI was 99.6 in 1983 and 144.5 in 1993. Thus, the CPI rose by (144.5 – 99.6)/99.6 = 45.1 percent. The average annual increase in the CPI over this period was 4.5 percent.Google Scholar

For compelling anecdotes, see, for example, Eckholm, Erik, “Frayed Nerves of People Without Health Coverage,” New York Times, July 11, 1994, at A1.Google Scholar

Collaborative activities that restrain trade violate Section 1 of the Sherman Act (15 U.S.C. § 1 (1988)), and expose the collaborators to fines, possible imprisonment, and civil suits for treble damages.Google Scholar

In September 1993, the DOJ and the FTC issued their initial enforcement policy statements. Based on experience and comments received, the enforcement policy has been refined. On September 27, 1994, the DOJ and the FTC released their Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust (see Special Supplement, Antitrust & Trade Regulation Report, Vol. 67, No. 1682, Sept. 29, 1994: S1–S25). These policy statements addressed the following: (1) mergers among hospitals, (2) hospital joint ventures involving high-technology or other expensive health care equipment, (3) hospital joint ventures involving specialized clinical or other expensive health care services, (4) providers’ collective provision of non-fee-related information to purchasers of health care services, (5) providers’ provision of fee-related information to purchasers of health care services, (6) provider participation in exchanges of price and cost information, (7) joint purchasing arrangements among health care providers, and (8) physician network joint ventures.Google Scholar

Monopsony power is buying power, that is, the influence that a large buyer has on market prices through adjustments in the quantity purchased.Google Scholar

See Statements of Enforcement Policy, supra note 5, at S14. This is consistent with the Supreme Court's view in Northwest Wholesale Stationers v. Pacific Stationery and Printing, 472 U.S. 84 (1985).Google Scholar

These concepts are examined carefully in Pindyck, Robert S. Rubinfeld, Daniel L., Microeconomics (Englewood Cliffs: Prentice Hall, 3rd ed., 1994): at 277–79.Google Scholar

This is the intellectual foundation for the economist's preference for competition as a driving force in the allocation of scarce resources. See, for example, Bator, F.M., “The Simple Analytics of Welfare Maximization,” American Economic Review, 47 (1957): 22–59. For the sources and consequences of market failure, see Bator, F.M., “The Anatomy of Market Failure,” Quarterly Journal of Economics, 72 (1958): 351–79.Google Scholar

For monopoly, allocative inefficiency arises because the monopolist restricts the quantity produced and thereby allocates too few resources to the production of the monopolized good or service. Analogously, the monopsonist restricts its purchases and thereby causes allocative inefficiency because too little is purchased and too few resources are allocated to the production of the monopsonized good or service.Google Scholar

For a survey of the ubiquity and diversity of the monopsony problem in the American economy, see Blair, Roger D. Harrison, Jeffrey L., Monopsony: Antitrust Law and Economics (Princeton: Princeton University Press, 1993).Google Scholar

When a monopsonist buys one more unit, the price for all units rises to the new level. Thus, the consequences of increased purchases is not simply the increased price for the incremental purchase. Instead, it is the increase in price that must be paid for all units. Formally, if total expenditures on X are then the effect of an increase in X is which is termed the MFC. If supply is positively sloped, then MFC must be above w because dw/dX is the positive slope of the supply curve.Google Scholar

Although the goals of antitrust laws have been widely debated, it is generally accepted that they were enacted to protect consumer welfare as well as competition. For a survey of the literature regarding the goals of antitrust policy, see Thomas Sullivan, E. Hovenkamp, Herbert, Antitrust Law, Policy and Procedure (Charlottesville: Michie, 3rd ed., 1994): at 1–22.Google Scholar

Section 1 of the Sherman Act forbids “[e]very contract, combination in the form of trust or otherwise or conspiracy in restraint of trade” (15 U.S.C. § 1 (1988)).Google Scholar

United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).Google Scholar

Id. at 223.Google Scholar

Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 219 (1948).Google Scholar

Id. at 235.Google Scholar

See Statements of Enforcement Policy, supra note 5, at 515.Google Scholar

Adopting these safeguards is also seen as a gesture of good faith that the purpose of the agreement is to achieve economic efficiencies rather than to pursue anticompetitive ends. See id. at S20, S15.Google Scholar

This is the standard proposed for measuring monopoly power; see Lerner, Abba, “The Concept of Monopoly and the Measurement of Monopoly Power,” Review of Economic Studies, 1 (1934): 157–75.CrossRefGoogle Scholar

This is analogous to the Lerner index of monopoly power. For further analysis, see Blair, Roger D. Harrison, Jeffrey L., “Cooperative Buying, Monopsony Power, and Antitrust Policy,” Northwestern University Law Review, 86 (1992): 331–67.Google Scholar

Since MFC = w + Q dw/dQ, the BPI becomes or Since (w/Q)(dQ/dw) is the elasticity of supply, the expression in (2) follows.Google Scholar

In this case, one needs the dominant buyer model (see Blair, and Harrison, , supra note 22). Landes and Posner used the dominant seller model to analyze market power on the selling side (Landes, William M. Posner, Richard A., “Market Power in Antitrust Cases,” Harvard Law Review, 94 (1981): 937–96). We have modified their model to deal with market power on the buying side.Google Scholar

Since Q_g = Q_s-Q_n, and Substituting the usual definitions of elasticity of demand and supply, one obtains the expression in (3).Google Scholar

The calculation of the BPI is Google Scholar

The calculation of the BPI is Google Scholar

The 73 percent is obtained by solving the following expression for x: Google Scholar

In fact, the DOJ and the FTC already do this in evaluating mergers under Section 7 of the Clayton Act.Google Scholar

Williamson developed this analysis in a merger context (Williamson, Oliver E., “Economies as an Antitrust Defense: The Welfare Tradeoffs,” American Economic Review, 58 (1968): 18–34). We have adapted his analysis for purposes of examining buying power.Google Scholar

Williamson has shown that, under plausible assumptions regarding the elasticity of demand, rather modest cost savings lead to gains in productive efficiency that outweigh the loss in allocative efficiency (id.). Similar results are likely to hold here as well.Google Scholar