Kaiser Permenente Healthcare is negotiating with two hospital groups for inclusion in its network. Suppose that the “value” or “surplus” created by including one hospital group is $80 million, while the value of including both hospital groups is $120 million.
Part 1: What is the likely bargaining outcome if Kaiser tells each hospital group that they’re going to reach an agreement with the other hospital group?
Part 2: Suppose that the two hospital groups merge. What is the likely post-merger bargaining outcome?
Part 3: How much is the merger worth to each hospital group?