1. Health Economics
Lecture 10
Physician, Hospital, and
Pharmaceutical Markets

2. Perfect
Competition
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 Dynamic
Game
Theory
D > MR
Examples
Commodities
Rice
Apples
Cell Phones Utilities
Government
Market Structure and Power
0% 100%

3. Eddie
Willie
Betrays
Willie
1Year
Silent
Silent
Betrays
Eddie
1Year
Eddie
Goes Free
Willie
10Years
Willie
Goes Free
Eddie
10Years
Willie
5Years
Eddie
5Years
Prisoner's
Dilemma

4. Prisoner's Dilemma
Pursuing the Dominant Strategy
Results in Non-Cooperation
and Leaves Everyone
Worse Off

5. Game Theory
Rules
Strategies
Payoffs

6. John Nash
(1928 - )
Game Theory
Nash Equilibrium
Nobel 1994
A Beautiful Mind

7. Duoploy
Two Sellers

8. 50 SR
100 SR
Verizon
1,000
100 SR
AT&T
1,000
50 SR
Verizon
500
Verizon
2,000
Verizon
700
AT&T
2,000
AT&T
500
AT&T
700
1. Reduce Price
2. Sell more
3. Increase profit

9. Physician Market
Asymmetric Information
Justifies Government
Intervention
Protect the Public

10. Barriers to Entry
Education
Residency
Licensing

11. Quantity
Price
Physician Market
Demand
Supply
Q2
P2
Q1
P1
1. Reduce
Supply
2. Increase
Price
3. Reduce
Quantity

12. Can the Market do a better job
of weeding-out incompetent
physicians than the
Government?
Incentives
Bureaucrats vs. Entrepreneurs
Who decides?

13. Market Incentives
Medical Liability
For-Profit Providers
Brand Names
Employed Physicians

14. Government Incentives
Bad reward for bad physicians
No rewards for good physicians
Bribes
Cannot be held liable - sued
Unseen

15. Optimal Practice Size
Economies of scale
3 - 7 physicians

16. Supplier-Induced Demand
Demand
Supply
Q2
P2
Q1
P1
1. Increase Demand 2. Increase Price 3. Increase Quantity

17. Malpractice Insurance
CompensateVictims
Deter Malpractice
Defensive Medicine