Measuring hospital competition.

This paper appraises the use of the Herfindahl market share index as an exogenous competition variable in empirical studies of the hospital sector. An analysis of cross-sectional Florida data shows that this index itself is significantly influenced by the demand and supply factors commonly included in econometric models of hospital performance. The analysis then illustrates that biased inferences about the effects of market competition on the costs of hospital care may result unless the values of the Herfindahl Index are treated endogenously in hospital cost models.