Re: Monopsony in Health Care

[Guest guest]

I have an MBA and I had never heard of monopsony. Monopoly, sure. (great game!) And, all about perfect competition. But not monopsony.

To: Locke Sent: Sunday, November 23, 2008 1:53:45 PMSubject: Monopsony in Health Care This whole concept is fascinating to me.I'm not sure I understand it, but...

Aparently a single-payor system would be a monopsony.

More info below...

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http://www.economist.com/research/Economics/alphabetic.cfm?letter=M#monopsony

Monopsony

A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.

Monopoly

When the production of a good or service with no close substitutes is carried out by a single firm with the MARKET POWER to decide the PRICE of its OUTPUT. Contrast with PERFECT

COMPETITION, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its MARGINAL revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.

Oligopoly

When a few FIRMS dominate a market. Often they can together behave as if they were a single MONOPOLY, perhaps by forming a CARTEL. Or they may collude informally, by preferring gentle NON-PRICE COMPETITION to a bloody PRICE war. Because what one firm can do depends on what the other firms do, the behaviour of oligopolists is hard to predict. When they do compete on price, they may produce as much and charge as little as if they were in a market with PERFECT COMPETITION.

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http://www.economypedia.com/wiki/index.php?title=Monopsony

A monopsony, like a monopoly, signifies complete control over a particular market. However monopsony is different from a monopoly. In a monopoly, it is the sellers who have complete control over the market, but in a monopsony the control of the market lies with a single buyer. Such a buyer is called a monopsonist. This buyer dictates the price of the product and exercises his complete control over the market, right from its labor force to raw materials. In a market that boasts of a situation of perfect competition, none of the individual buyers manage to acquire complete control.

Coined by Joan , monopsony is also known as the monopoly of the buyer. Ernest and Julio Gallo were monopsonists. They had a complete grasp over the market and made the sellers of grapes sell their produce at the price quoted by them.

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http://ocw.mit.edu/NR/rdonlyres/Economics/14-01Fall-2007/6A4AA9DB-9DBD-47D0-935A-033A93C7C2B4/0/14_01_lec24.pdf

Monopsony -- A monopsony is a market in which there is a single buyer. Typically, a monopsonist choosesto maximizethe total value derived from buying theg oods minus the total expenditure on the goods: V (Q)−E(Q).

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monopoly, monopsony

When only one supplier, provider or seller is available for a given commodity in a given market, that individual or entity is referred to as a monopoly, and has monopoly control over that market.When only one buyer is available for a given commodity, this is referred to as a monopsony. =================================== Monopsony Definition of Monopsony: Monopsony is a state in which demand comes from one source. If there is only one customer for a certain good, that customer has a monopsony in the market for that good.Analogous to monopoly, but on the demand side not the supply side.A common theoretical implication is that the price of the good is pushed down near the cost of production. The price is not predicted to go to zero because if it went below where

the suppliers are willing to produce, they won't produce.==========================

It's a little confusing to me -- since who is the customer in our circumstance?Is it the physician, patient, or insurance?But it kind of makes sense -- if there is only one customer for cookies and lots of cookie makers, then the customer for cookies could offer less and less for the cookie -- until the offer is below the cost of making the cookie and then the cookie makers just stop making cookies.

It's kind of weird in our situation....the insurance company may have a monopoly in the sense that patients don't have much choice and the insurance company can raise prices on patients very high.

But the insurance companies have a monopsony in the sense that they are the customer that physicians have to "buy" from -- they are the cookie customer and we are the cookie/health makers.In some communities, they are the only "customer" for the cookies/health being made by the physicians, so they can offer lower and lower prices for the delivery of the cookies/health the physicians make.

Although technically, we do have another "customer" - the cash paying patient -- which is where some doctors have gone -- no insurance -- deal directly with the patient/customer.

Interesting concepts once you wrap your head around it.

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This word has been thrown out, too...

oligopoly

A small group of suppliers, providers or sellers who have the ability to control market prices for a given commodity if they should ever decide to work together for that purpose. While cartel is often used in place of oligopoly, cartels don't necessarily have the ability to control the market, and they aren't necessarily created for the purpose of exerting control, while the primary function of an oligopoly is to preserve its own power by exerting influence over markets when they feel it is in the interest of members to do so. ==============================

http://www.medscape.com/viewarticle/452954_5

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http://www.springerlink.com/content/r8x82782p06g725x/fulltext.pdf

Int J Health Care Finance Econ (2008) 8:1–11

DOI 10.1007/s10-7

Do health insurers possess monopsony power in the hospital services industry?

Abstract This paper uses metropolitan data to test empirically if health insurers possess monopsony or monopoly-busting power on the buyer-side of the hospital services market. According to theory, monopsony power is indicated by a fall in output, whereas, monopoly- busting power is shown by an increase in output when buyer concentration rises. The empirical results provide evidence that greater health insurer buyer concentration is not associated with monopsony power. Instead, some evidence is found to suggest that higher health insurer concentration translates into increased monopoly-busting power. That is,

metropolitan hospitals offer increased services when the buyer-side of the hospitals services market is more highly concentrated.

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http://www.ama-assn.org/ama1/pub/upload/mm/368/mayftctestimony.pdf

Federal Trade Commission and the Department of Justice Hearings on Health Care Competition Law and Policy

RE: The Impact of Monopsony on the Practice of Medicine: Market Definition, Competitive Effects and Countervailing Power Theory and Practice

Presented by: E. Foreman, PhD, JD, MPA

Director, Pennsylvania Medical Society

Health Services Research InstituteApril-May 2003

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http://www2.scc-fl.edu/falbritton/ECO2023/Micro%20Learning%20Tools/Micro%20Chapters%20at%20a%20Glance/Chapter%2016/chapter_21_at_a_glance.htm

In a sense, the perfect competition versus monopoly diagrams, side-by-side, could be "flipped and they would look just like the perfect competition and monopsony graphs for the labor market (two sides to a coin). You can imagine that this is so if you have ever heard of a "one-company-town, i.e. one where there is only one employer and where the only employer owns all the places where the workers live and the store where they shop. The workers end up "owing their souls to the company" because they are "exploited" as consumers and workers (in this chapter, the economic definition, not the emotional definition of exploitation will be discussed).!

4. A monopsony is a market in which a single firm is the only buyer. Thus, as can be expected, when there is a monopoly in the supply of a product, there is often a monopsony in the demand of a specialized factor of production such as labor. A bilateral monopoly is a market in which a single seller faces a single buyer.

Monopsony will hire fewer workers and pay a lower wage compared to the competitive outcome. A monopsony can be analyzed in a similar fashion as a monopoly in comparing the monopsony to a perfectly competitive labor market. In a perfectly competitive labor market, the wage and the employment are determined by the market demand (based on marginal physical product of labor and the price at which the product of this labor can be sold, and market supply). As shown above this would be at a wage of approximately $7 and 200 workers.

As with the monopoly and price being different from marginal revenue, the wage is different than the supply curve. Thus, the monopsony will produce where its "marginal resource cost" is equal to the demand curve and find the wage by going down (instead of up as is the case with monopoly to the wage (or supply) line (wage of $6.02 and 151, lower wage than perfect competition and lower employment (higher unemployment) with workers. The difference between this wage and the competitive market wage is the level of "exploitation". With 151, the MRP of the last worker is $9.02, thus the level of exploitation is $3 per worker for this last worker. This is an example of "positive" analysis versus the normative approach which explains exploitation by labeling it as "unfair".

5. In a market dominated by monopolies and monopsonies, the consumer would pay the highers prices for the least amount of output and workers would earn the lowest wages and face the highest levels of unemployment. Such an economy would be stagnant and unproductive; this is perhaps the best argument against big business.

The response to monopsony power in the United States is the labor legislation created in the 1930's and later. This legislation encourages the formation of labor unions. Big business, faced with the alternative of being broken-up by government, supported this legislation. A key question, however, is whether the creation of a monopoly on the labor side is the correct response to the problem of monopsony or is this the case of "two wrongs making a right"?

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http://www.abanet.org/antitrust/at-committees/at-hcic/pdf/program-papers/McCarthy-.pdf

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http://www.ftc.gov/ogc/healthcarehearings/docs/030424mccarthy.pdf

Locke, MD