An Economic Analysis of the Joint Purchasing Safety Zone

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.

The CPI was 99.6 in 1983 and 144.5 in 1993. Thus, the CPI rose by (144.5 – 99.6)199.6 = 45.1 percent. The average annual increase in the CPI over this period was 4.5 percent.

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

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.

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.

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

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).

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

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.

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.

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).

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 TFC = wX , , then the effect of an increase in X is dTFC dX = w + dw dX X , 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.

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.

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)).

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

Id. at 223.

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

Id. at 235.

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

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.

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.

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.

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

In this case, one needs the dominant buyer model (see Blair 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.

Since Q_g = Q_s-Q_n, dQ g dw = dQ s dw - dQ n dw , and dQ g dw ⋅ w Q g = dQ s dw ⋅ w Q s ⋅ Q s Q g - dQ n dw ⋅ w Q n ⋅ Q n Q g . Substituting the usual definitions of elasticity of demand and supply, one obtains the expression in (3).

The calculation of the BPI is BPI = 0.25 0.5 + 0.5 ( 0.75 ) ≈ 0.29.

The calculation of the BPI is BPI = 0.45 2 + 2 ( 0.55 ) ≈ 0.15.

The 73 percent is obtained by solving the following expression for x: x 2 + 2 ( 1 - x ) ≈ 0.29.

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

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.

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.