Efficiency, growth, and concentration: An empirical analysis of hospital markets

Abstract

Taking an evolutionary view, Harold Demsetz hypothesized that firms differ persistently in efficiency and that industry concentration results from growth of efficient firms at the expense of inefficient ones. We test this idea with microdata from the hospital industry. Initial hospital efficiency and subsequent growth (and profitability) are significantly and positively related. Also, greater initial variation in hospital efficiency within local markets is positively related to subsequent growth in market concentration. Our findings support the evolutionary efficiency hypothesis, though they cannot confirm the stronger idea that variation in efficiency is the dominant explanation for changes in concentration.