Health EconomicsLecture 9

Structure, Conduct, Performance, and Market

Analysis

Objectives

SCP ParadigmPerfect Competition

MonopolyBrand Competition

Oligopoly

Structure, Conduct, and Performance

Basic ConditionsSupply

Technology

Unionization

Legal Environment

Economies of Scale

Demand

Price Elasticity

Demand Conditions

Market ConditionsNumber, type, size distribution of sellers and payers

Type of Product

Barriers to Entry

Information Asymmetry

ObjectivesProfit Maximization

Quantity Maximization

Quality Maximization

Discretionary Spending

Other

Public PolicyTaxes and Subsidies

Antitrust Regulations

Price Regulations

Certificate of Need Laws

Peer Review Organizations

ConductPrice Behavior

Product Promotion

Research and Development

PerformanceProduction and Allocation Efficiency

Equity

Technological Progress

Market StructuresPerfect Competition

Monopoly

Monopolistic Competition

Oligopoly

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%

Perfect CompetitionMany SellersMany BuyersNo barriers

Same productTiny share

Q

$

Perfect Competition

Demand=

MRPrice

Marginal Costs

QProductively

Efficient

AverageCosts

Profit

Monopoly

Only One SellerNo Close Substitutes

Barrier to Entry

Barriers to Entry

Government ProtectionKey Resource

Network ExternalitiesEconomies of Scale

Patents

Copyrights

20 Years

Lifetime plus 70 Years

Franchise

Exclusive Legal Provider

New Drugs

10 Years of Testing before Approval

10 Years of Monopoly

Network Externalities

The more who use it

The more valuable it becomes

Natural Monopoly

One firm can supply entire market at a lower average cost than two or

more firms

Natural Monopoly

The more I makethe lower my costs

Large Fixed Costs

Is competition always good?

Sometimes it can lead to higher prices

MonopolyOutput and Price

Lower Price:

Good: Sell More

Bad: Less Revenue Per Unit

Q

P

Perfect Competition

Marginal CostMC Average Cost

ATC

Total Cost

$

Quantity

ProfitDemand=MR

Total Revenue

Demand

MR

=

Perfect CompetitionMonopoly

Perfect Competition Perfect Competition Perfect Competition Monopoly Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3 $3 $3 $5 $5 $5

$3 $6 $3 $4 $8 $3

$3 $9 $3 $3 $9 $1

$3 $12 $3 $2 $8 -$1

$3 $15 $3 $1 $5 -$3

Demand MR=

Perfect CompetitionMonopoly

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

LoseG

ain

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1LoseG

ain

LoseG

ainLose

Gai

n Demand

Marginal Revenue MR

Marginal CostMC

Q

P

Marginal Revenue MR

Monopoly

Average CostATC

Cost

$

Q

Profit

Demand

Deadweight Loss

Consumer Surplus

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TCor (P-ATC) x Q

AntitrustLaws

Collusion

Felony

MonopolisticCompetition

Brands competing with each other.

Differentiating products

Pay more for more choices

Q

$

D

MR

=

Monopoly

Perfect Competition

Q

$

Monopolistic Competition

DMR

Short Run

Long Run

Steep Demand

Demand Flattens

Q

$Short Run

Long Run

DMR

MC

ATCProfit

Profits disappearin the long run

due to competition

High PriceLarge Quantity

Lower PriceLower Quantity

QSQ

PPS

L

L

Demand Flattens

Profit

Monopolistic Competition

D

MR

MC

Competition flattens the Demand Curve

and squeezes profits.Profits

Q

$

Market Competition

Short Run Demand

Short Run Marginal Revenue

Long Run Demand

Long Run Marginal Revenue

Marginal Costs

AverageTotal Costs

QSR

PSR

QLR

PLR