Assignment 3 Market Model Patterns of Change
The Industry and General Pattern of Change Of Market Model
The fast paced industry surrounding health insurance in the United States has experienced rapid growth. There are numerous providers representing a competitive marketplace where no single entity rules over prices. However, the industry is undergoing massive transformation processes and slowly evolving into an oligopoly, where only a few large firms will eventually control market dynamics.
Throughout the years there has been more than 500 mergers involving health insurers (Bakhtiari, 2010). Although many small insurance companies operate in the ...view middle of the document...
Conversely, a single firm that cuts prices will only see a small increase in demand and no increase in market share, as competitors match the price reduction. As a result, a firm will have a kinked demand curve. The curve will be flat above the current price, since a price hike results in a loss of market share. The curve will be steep below the current price, since a price reduction results in no increase in market share. Changes in cost do not impact output and prices, as long as marginal cost remains in the vertical portion of marginal revenue.
Hence the model predicts that prices in the long run should be fairly rigid in an oligopoly. The kinked demand theory suggests that there will be price stickiness in these markets and firms will rely more on non-price competition to boost sales, revenue and profits. The result is no gain in market share and relative small increases in quantity demanded. In the health insurance industry, this could indicate that insurance premiums will remain fairly stable.
Factors Affecting Competitive And Productivity Measures
The first factor that affects the degree of competitiveness of the health insurance industry is government regulation. More government regulation on insurance premium rates means that the industry overall will become less competitive, and prices will not be determined by industry supply and demand. The second factor is the number of firms operating. A larger number of firms means that industry overall prices will be reduced, reducing profit margins. The third is government provided health insurance. Such services by the government will affect the overall competitiveness of the industry because private firms will be unable to compete against government provided insurance plans.
Three productivity measures to show how the industry is evolving include the number of health insurance buyers, average prices of health insurance plans, and overall average medical costs. The number of health insurance buyers will help understand the growth patterns in customer base, and demand for health insurance plans. Average price of health insurance will show the industry's evolution by examining patterns of profit growth in relation to health insurance costs. Medical costs will show the relationship between industry growths, inflation of costs, and increase in general medical care.
Pricing Strategy That Could Lead To Transaction
In the health insurance industry, transaction cost could arise from process outsourcing, enforcement and compliance costs, and increased product complexity. When firms in the insurance industry grow and consolidate in due time (due to mergers, high fixed costs), outsourcing of processes may become a necessity. As firms gather up more and more customers, the current workforce will no longer be able to handle jobs. For firms, hiring more employees could be very costly because of increasing market salaries; therefore outsourcing could be the only option. If outsourcing does...