Inpatient and outpatient data were used to create market segments consisting of hierarchical combinations of surgical procedure, then type of payer, and then location of patients' residences. The competitive effect of one hospital's caseload for a given surgical specialty on the caseload of another hospital was determined from the numbers of patients in each segment. Earlier methods for estimating surgical competition that ignored market segments over-estimated the competitive effects of one hospital on another. Thus, results differed from those obtained previously for all types of hospital admissions. When actual market segments with homogeneous groups of patients are used, competitive effects of hospitals in the same market area are far less than expected.