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