Health EconomicsLecture 10

Physician Market

PerfectCompetition

Monopolistic Competition

Oligopoly Monopoly

Number of Firms

Many Many Few One

Type of Product Identical Different Similar Unique

Ease of Entry Easy Easy Substantial Blocked

Demand D = MR DynamicGame

TheoryD > MR

ExamplesCommodities

RiceApples

Cell Phones UtilitiesGovernment

Market Structure and Power

0% 100%

Eddie

Willie

Betrays

Willie1 Year

Silent

Silent

Betrays

Eddie1 Year

EddieGoes Free

Willie10 Years

WillieGoes Free

Eddie10 Years

Willie5 Years

Eddie5 Years

Prisoner's

Dilemma

Prisoner's Dilemma

Pursuing the Dominant Strategy

Results in Non-Cooperation

and Leaves Everyone

Worse Off

Game Theory

RulesStrategies

Payoffs

John Nash(1928 - )

Game TheoryNash Equilibrium

Nobel 1994

A Beautiful Mind

Duoploy

Two Sellers

50 SR

100 SRVerizon1,000

100 SR

AT&T1,000

50 SR

Verizon500

Verizon2,000

Verizon700

AT&T2,000

AT&T500

AT&T700

1. Reduce Price2. Sell more3. Increase profit

Physician Market

Asymmetric Information

Justifies Government Intervention

Protect the Public

Barriers to Entry

EducationResidency Licensing

Quantity

Price

Physician Market

Demand

Supply

Q2

P2

Q1

P1

1. Reduce Supply

2. IncreasePrice

3. Reduce Quantity

Can the Market do a better job of weeding-out incompetent

physicians than the Government?

IncentivesBureaucrats vs. Entrepreneurs

Who decides?

Market Incentives

Medical LiabilityFor-Profit Providers

Brand NamesEmployed Physicians

Government Incentives

Bad reward for bad physicians

No rewards for good physicians

Bribes

Cannot be held liable - sued

Unseen

Optimal Practice Size

Economies of scale

3 - 7 physicians

Supplier-Induced Demand

Demand

Supply

Q2

P2

Q1

P1

1. Increase Demand 2. Increase Price 3. Increase Quantity

Malpractice Insurance

Compensate Victims

Deter Malpractice

Defensive Medicine