• *We wish to thank Paul Gertler, Gautam Gowrisankaran, Mark Manuszak, Carol Simon, Jonathan Skinner, Doug Wholey, participants in sessions at the 1999 American Economic Association meetings and the 2001 International Health Economics Association conference, the editor and two anonymous referees for helpful comments. The usual caveat applies.


We extend the entry model developed by Bresnahan and Reiss to make use of quantity information, and apply it to data on the U.S. hospital industry. The Bresnahan and Reiss model infers changes in the toughness of competition from entry threshold ratios. Entry threshold ratios, however, identify the product of changes in the toughness of competition and changes in fixed costs. By using quantity data, we are able to identify separately changes in the toughness of competition from changes in fixed costs. This model is generally applicable to industries where there are good data on market structure and quantity, but not on prices, as for example in the quinquennial U.S. Economic Census. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market.