Vertical Restraints in Health Care Markets

Abstract

We analyze health care option demand markets with vertical restraints divided along two dimensions: naked and conditional exclusion, and vertical integration; applicable to the upstream, the downstream, and both markets. Our unified framework includes forward and backward integration, and joint ventures. We show that conditional exclusion has the same bargaining effects as vertical integration, but without the joint profit optimization. There are no individual incentives for exclusive dealing, but hospital-insurer pairs can find it jointly profitable to apply downstream vertical restraints on third parties. Outright downstream monopolization arises only when consumers have strong enough preferences for free provider choice.