Lec7_market_handout - Market Structure In the Healthcare...

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Market Structure In the Healthcare Market Structure In the Healthcare Industry Industry Professor Vivian Ho Health Economics Fall 2009 These notes draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies. Southwestern Cengate 2010
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Outline Outline Defining perfect competition The market structure continuum Monopoly Monopolistic competition Oligopoly The market for organs
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Characteristics of Perfect Competition Characteristics of Perfect Competition Consumers pay the full price of the product Consumers will respond to differences in prices among sellers All firms maximize profits Firms have incentives to satisfy consumer wants and produce efficiently
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Characteristics of Perfect Competition Characteristics of Perfect Competition (cont.) (cont.) There is a large number of buyers and sellers, each of which is small relative to the total market No one buyer or seller is powerful enough to influence or manipulate the market price of a product All firms in the same industry produce a homogeneous product A consumer can easily find substitutes for the product of any given firm
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Characteristics of Perfect Competition Characteristics of Perfect Competition (cont.) (cont.) No barriers to entry or exit exist New firms can enter the industry All economic agents possess perfect information Consumers and firms can make informed choices All firms face nondecreasing average costs of production Rules out a “natural monopoly”
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Monopoly Model Monopoly Model In contrast to perfect competition, a monopoly market has the following features: One seller Homogeneous or differentiated product Complete barriers to entry Because there is only one firm, that firm faces the market demand curve, which is downward sloping
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Monopoly Model Monopoly Model (cont.) (cont.) What is the profit-maximizing price and quantity for a monopolist? Recall that all firms will maximize profits where MR=MC We have already seen that the marginal cost curve for a firm depends on its production function and input prices What does the firm’s MR curve look like?
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Monopoly Model Monopoly Model (cont.) (cont.) MR = P + Q • ( P/ Q) Because the second term in this formula represents a revenue loss, it is always negative Thus, at each level of output, marginal revenue is always lower than price The marginal revenue curve lies under the demand curve
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Monopoly Model Monopoly Model (cont.) (cont.) Quantity Dollars per unit Demand MR
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Monopoly Model Monopoly Model (cont.) (cont.) We are now ready to find the profit- maximizing output for a monopolist The monopolist sets output
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