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Show A, Williamson assumes that competition between two constant cost firms has driven price down to average cost for each firm, AC1. Given the market demand function D, market price equals PI with output Ql and consumer welfare is maximized. Suppose a collaborative agreement between the two firms generates cost savings (technical efficiency) which drives costs down to AC2. Area C represents the resource efficiencies or savings due administration of antitrust law. We do not believe that our characterization is necessarily incompatible with those expressed elsewhere. However, since our paper deals, in part, with the cost containment efforts of health care providers, the Williamson characterization is particularly useful. to the agreement. For example, a merger between hospitals might allow the elimination of waste from duplicative services through more efficient patient allocation. However, as a result of increased market power, the collaborative agreement is able to raise net price to P2 and lower quantity to Q2. This increase in market price generates area B, a redistribution of income from those consumers who buy at the higher price to the members of the collaborative agreement (as the result of their exercise of market power). The decrease in the quantity consumed from Ql to Q2 generates area A, the deadweight loss to society (a pure loss of consumer welfare). Figure A P2 PI B AC1 AC2 Demand Q2 Quantity If antitrust officials seek to preserve the welfare of consumers, they focus on areas A and B alone. That is, a collaborative agreement would be challenged if it gave the collaborators enough market power to significantly raise market price and, by implication, lower the quantity that consumers purchase.^ Ancillary considerations, such as the ability to forestall entry, often enter the analysis. If, however, the authorities focus on economic efficiency, they compare area C, the cost savings or technical efficiency of the agreement, 5 Antitrust authorities are likely to be suspicious if market power is gained throught the process of combination and alliance. If, however, market power is gained through the process of internal growth (superior management or entrepreneurship) or innovation (e.g. the grant of a patent or unique marketing) antiturust authorities are likely to take a benign attitude. against area A, the deadweight loss to society. An agreement satisfies the condition of economic efficiency when area C exceeds area A. That is, a collaborative arrangement that creates enough market power to significantly raise market price would be allowed to stand if it could show sufficient savings of resources. Generally speaking, the goal of economic efficiency would result in fewer antitrust violations than the goal of consumer welfare but may result in less politically and socially acceptable market structures.6,7 6 Flynn (1990) alludes to the goal of economic efficiency as a rigid application of the neoclassical model of the market. Flynn finds this particularly disturbing in a political and social setting because a-priori this model cannot say anything about the manner in which general happiness of society is impacted by the redistribution of income, area B (the neoclassical model s incapable of interpersonal comparisons of satisfaction). Utah's Health: An Annual Review 1994 105 |