Competition and Market Power in Option Demand Markets, RAND Journal of Economics
We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets". In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each suppliers' market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the suppliers' inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego.