Monopsony Power and Cost Structure: Evidence from the U.S. Hospital Industry

Abstract

We examine the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries. Data Availability: Data are publicly available from the sources cited in this study. JEL Classifications: D22; D23; I11; M20; M40.