Lecture 1 - the industrial organization of health care markets

Question 1

WHAT IS INDUSTRIAL ORGANIZATION?

Answer 1

“To study industrial organization is to study the functioning of markets, a central concept in microeconomics.”

Question 2

4 REQUIREMENTS:

Answer 2

• Price taking behaviour.
  o Due to issues in the past, there might be organization with a lot of power.
  o There is not a market.
• perfect information
  o agency problems
  o information is asymmetrically divided among parties.
• homogeneous products
  o markets are by definition dealing with heterogenous products.
• free entry and exit
  o it would be problematic if everyone could become a doctor, or everyone could develop a new medicine.

Question 3

GAYNOR ET AL. (2015): “MULTISTAGE MODEL”

Answer 3

• discussion of literature structured around five stages:
  1. quality determination in provider markets  M1
  2. price and network determination in provider markets  M2
  3. premium determination in insurance markets  M4
  4. consumer choice in insurance markets  M4
  5. incentives and provider referral decisions/ consumer utilization  M3
• each stage has impact on equilibrium outcome and welfare.
• stages are related: “optimal choices in one stage are functions of expectations regarding the rest”.

Question 4

• what mechanisms could explain that hospitals competition affects quality?

Answer 4

 Less organizations  more concentrated  less competition  lower effort to focus on quality.

Question 5

• Markets with regulated prices

Answer 5

o Prices are fixed.
o Quality is increasing in price, the elasticity of demand with respect to quality, and the firm’s total demand.
o Quality is decreasing in the marginal costs of quantity or quality.
o Competition will result in higher quality

Question 6

• Markets where hospitals set prices and quality

Answer 6

o Between hospitals and insures for example
o Quality will increase if the quality elasticity of demand increase or the price elasticity of demand declines (and vice versa)
o Quality will also increase if price increases relative to the marginal cost of quality (and fall if the opposite happens)
o Outcome is not known beforehand because it depends on ratio of elasticity