<p>You can still do it using production function as instrument. Thing is that even if price setting is endogenous because firm has market power, that does not mean price does not depend on firm cost.</p>
<p>In fact the  textbook way of modeling market power is using the markup model where prices are given as:</p>
<p><span class="math-container">$$p = (1+\mu) c$$</span></p>
<p>where <span class="math-container">$p$</span> is price, <span class="math-container">$\mu$</span> is market power and <span class="math-container">$c$</span> marginal cost.</p>
<p>Hence if you can estimate production function and marginal costs in some auxiliary model you can then use marginal costs as an instrument for price in either 2SLS or GMM and control for endogeneity that way.</p>

CC BY-SA 4.0
2023-04-13T20:16:40.620Z
2023-04-13T20:31:05.200Z
2023-04-13T20:31:05.200Z
1muflon1
<p>Basically, I want to see how changes in hospital prices for a certain procedure can be used to predict quality of treatment. Problem is in my sample, the private hospitals are price makers so any change in price is endogenously controlled by the hospital. I want to know how I can address that issue. I saw some papers that estimate a production function and they have a control function for price but in that case, the hospitals all were price takers.</p>

<industrial-organisation><price-discrimination><endogeneity><health-economics>
How to control for prices when they are endogenously set by hospitals?
UNMaster
# How to control for prices when they are endogenously set by hospitals?

(Asked by: username_0 on 2023-04-13)

Basically, I want to see how changes in hospital prices for a certain procedure can be used to predict quality of treatment. Problem is in my sample, the private hospitals are price makers so any change in price is endogenously controlled by the hospital. I want to know how I can address that issue. I saw some papers that estimate a production function and they have a control function for price but in that case, the hospitals all were price takers.

**Tags:** industrial-organisation, price-discrimination, endogeneity, health-economics

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## 1 answers

### Answer by username_1 on 2023-04-13. Score: 1

You can still do it using production function as instrument. Thing is that even if price setting is endogenous because firm has market power, that does not mean price does not depend on firm cost.

In fact the textbook way of modeling market power is using the markup model where prices are given as:

$$p = (1+\mu) c$$

where $p$ is price, $\mu$ is market power and $c$ marginal cost.

Hence if you can estimate production function and marginal costs in some auxiliary model you can then use marginal costs as an instrument for price in either 2SLS or GMM and control for endogeneity that way.


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