DIPLOMA OF HEALTHCARE

MANAGEMENT

DHM 2133
HEALTH ECONOMICS

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 DHM 2133
Lecture by: LALITA
ANBARASEN

CHAPTER 8: The
Competitive
Market
Definition of competition

Perfect competition means that individual firms are price takers

and maximize profits, consumers maximize utility, no barriers to
entry or exit exist, and consumers have perfect information.

Components of quality

1. Clinical outcomes
2. Access and equality
3. Costs and efficiency
4. Satisfaction
5. Professionalism
6. System structure
When applied to healthcare industries, many of the assumptions
of microeconomic analysis and characteristics of perfect
competition often do not fit well. The THREE (3) examples that
supports this statement.

1. First, the nonprofit status of medical firms means that

healthcare providers may not pursue maximum economic
profits.

2. Second, licensure creates a barrier to entry and decreases

potential competition.

3. Third, consumers typically lack perfect information about prices

and technical aspects of medical services, which may lead to
physicians practicing opportunistically.
Purposes fulfilled by a perfect competition model.

1. First, supply and demand, which are based on perfect

competition, are useful in determining the impacts of market
changes on price and output—even in medical markets.

2. Second, healthcare markets may be reasonably competitive so

supply and demand frameworks are appropriate.

3. Third, the perfectly competitive market can serve as a gold

standard to which other market models can be compared in
terms of changes in prices and outputs
Factors that may enhance the benefits/outcomes.

1. Adequate data and information

2. Market characteristics

3. Having a wide range of providers

4. Appropriate management

5. appropriate financing and monitoring

THE PERFECTLY COMPETITIVE MARKET

The characteristics of perfect competition are many sellers possessing

tiny market shares, a homogeneous product, no barriers to entry, and
perfect consumer information.

There is substantial actual competition because there are many

additional firms offering identical products.

The potential for competition also exists because nothing prevents new
firms from entering the industry.
For example, a single supplier of alcohol swabs may be reluctant to
increase price if the resulting higher profits induce new firms offering
alcohol swabs to enter the market.

The high degree of both actual and potential competition in a perfectly

competitive market means that one firm’s production decision has no
meaningful impact on the overall performance of the industry.
Therefore, the individual firm has no market power.
Market Entry and Exit

As noted above, firms may enter the industry as changes in profits in various markets
occur. For example, because there are no barriers to entry in a perfectly competitive
market, excess profits create an encouragement for new firms to enter an industry as
they strive to make higher-than-normal rates of return.

On the other hand, economic losses create reason for firms to leave an industry to
avoid an unusually low rate of return on their investment.

When long run normal profits exist in a perfectly competitive industry, the market is in
long run equilibrium, with firms having no reason to enter or exit the industry.

Normal profits result when the revenue generated just covers the opportunity costs of
every input, including the normal return to asset.

.
Because of entry and exit in the market, it is expected that the typical perfectly
competitive firm earns a normal profit in the long run.

The importance of entry and exit in a market can be seen as follows. Entry of
new firms leads to greater allocation of resources.

Analogously, exit of firms helps to eliminate excess resources.

Profits serve as an important reason and bring about an efficient allocation of

resources in the long run.

Free entry and exit of firms can occur only in perfectly competitive.
Thank you