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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