HCA 6013 Dynamics of Healthcare Markets
Module Seven: Healthcare Supply — The Profit Motive in Healthcare
Instructions: Provide detailed answers to the study questions below. Use course materials,
the supplemental readings in the module, and reputable external sources where
appropriate. Include references at the end. This single document contains all answers (1–
8).
, 1) Two Assumptions of Competitive Market Theory Violated in Healthcare
Competitive market theory assumes (a) many buyers and sellers with no single agent able
to influence prices (price-taking behavior), and (b) homogeneous products where
consumers are fully informed and can substitute freely among sellers. In healthcare, these
assumptions are often violated.
First, market power: Providers (hospitals, physician groups) frequently have market
power due to geographic concentration, vertical integration, and specialty services—
allowing them to influence prices rather than accept them. Consolidation and hospital-
physician integration reduce competition and create price-setting behavior.
Second, product heterogeneity and information asymmetry: Healthcare services are
complex, heterogeneous, and patients lack full information. Quality is difficult to observe
ex ante, and services are not perfect substitutes. Third-party payers and insurance blunt
price signals and reduce patients' price sensitivity, further violating the assumptions.
These violations lead to market outcomes—higher prices, reduced responsiveness to
consumer preferences, and potential inefficiencies—not predicted by simple competitive
models.
Module Seven: Healthcare Supply — The Profit Motive in Healthcare
Instructions: Provide detailed answers to the study questions below. Use course materials,
the supplemental readings in the module, and reputable external sources where
appropriate. Include references at the end. This single document contains all answers (1–
8).
, 1) Two Assumptions of Competitive Market Theory Violated in Healthcare
Competitive market theory assumes (a) many buyers and sellers with no single agent able
to influence prices (price-taking behavior), and (b) homogeneous products where
consumers are fully informed and can substitute freely among sellers. In healthcare, these
assumptions are often violated.
First, market power: Providers (hospitals, physician groups) frequently have market
power due to geographic concentration, vertical integration, and specialty services—
allowing them to influence prices rather than accept them. Consolidation and hospital-
physician integration reduce competition and create price-setting behavior.
Second, product heterogeneity and information asymmetry: Healthcare services are
complex, heterogeneous, and patients lack full information. Quality is difficult to observe
ex ante, and services are not perfect substitutes. Third-party payers and insurance blunt
price signals and reduce patients' price sensitivity, further violating the assumptions.
These violations lead to market outcomes—higher prices, reduced responsiveness to
consumer preferences, and potential inefficiencies—not predicted by simple competitive
models.
