Describe the business and explain the general pattern of change of the particular market model indicating how this change is likely to impact business operations.
Health insurance industry is one of the types industries with a competitive market. The market is competitive in nature due to availability of different choices and power of prices is not available in the market. This industry is growing very fast due to free entry and exit from the market by different companies. So much transformations and evolutions are taking place in the industry (University of Michigan, 1900). The type of market model shown by the health industry is oligopoly. The market structure of this industry is controlled by very few big companies.
77.47% of companies found in health insurance industry today are involved in merging. USA expects all health insurances to increase in enrollment by October this year due to the requirement by the law for every American to have insurance by January 1, 2014. Over 200,000 members might be forced out of the business, an analyst says so (Feldstein, 2011). Small insurance firms sometimes do not have the ability to employ technology and infrastructure to enable efficiency in management of care of its members. But when firms merge, they have more power than the small insurers who are thrown out of business. The law requires that there will be approximately 5 million or more insurers that will have insurance by 2014 (Feldstein, 2011).
Hypothesize the basic short-run and long-run behaviors of the model in the business you have chosen in a “market economy.” Provide support for your assumptions and conclusions.
In this type market model, there is no explanation is stated for behavior of short-run and long-run in the market economy. There are models which make assumptions that if one company increases its prices, the other companies in the market with not follow but will keep their prices constant no increase. The other companies believe that if one company increases its prices, their customers will increase due to low and fair prices thus not increasing their prices (Feldstein, 2011).This situation encourages competitiveness in this industry and thus the demand curves of the companies which do not increase prices remain to the current equilibrium price.
To increase the share of the market, some companies may increase quality of the services they offer by employing technology and infrastructure to lower costs and guarantee the customers delivery of services at any time. Other insurance companies might increase their working hours and enabling online customer support. The kink demand curve found in oligopoly; which shows a point of discontinuation in the marginal revenue curve of a company. This results to price rigidity which is caused by the gap between marginal revenue curve and the current price or output level. This is because at profit maximization the marginal revenue is equal to marginal cost. Any change in marginal cost results to a new point of equilibrium between marginal revenues of the firm and marginal costs and to new optimal price (Vives, 2001).
Despite the changes in marginal costs, the price and output at the kink remain the same due to the existence of the gap in marginal revenue curve. In health insurance industry, there is leadership in price due to the existence of large companies in the industry; these companies establish prices of the market as the others in the industry follow. The price or output leaders in the industry face problem similar that of monopolies because the other firms in the industry are price takers and thus face competitive out or price problem (Vives, 2001).
Explain the major factors that affect the degree of competitiveness in your business. Use the data to develop at least three (3) measures (e.g., productivity measures) to show how the industry is evolving. Provide evidence supporting your rationale.
Competition in this market structure has been affected by the improvement in technology; technological improvement has to be applied in health insurance industry in order to increase the quality and quantity of the drugs and services. Some small companies in this industry face the challenge of inadequate funds to adapt the advancements in the technology thus they are outdone by the big firms and few mergers in the market because they have adequate funds to adopt the advanced technology thus the improvement in quality and lower costs of production of their goods and services. This many help the companies with high quality goods and services to increase the share of the market (Feldstein, 2011).
Research two of the business’ closest competitors to determine the pricing strategy for each business indicating how knowledge of this information may influence pricing decisions in your business. Provide support for your rationale.
Price competition is the most seen in this industry. Although there might leaders in this market, the price they set may not be followed by others. Thus the firms whose price remains the same receive the largest share of the market. Always the consumers will demand more of the products when at a low price (United States, 2009).
Regulation by the federal government in the health insurance industry helps to control the competition in the market. In health industry the some investors see the competition between firms as the problem to be tamed with top-down prescriptive regulation; they do not see it as an opportunity to improve the welfare of the consumers by enhancing quality and efficiency (United States, 2009). Government regulation affects the price and quality of the products. Pricing regulatory may affect the consumers and service providers indirectly; consumers might be restricted from access of health care services and providers’ responses to consumer demand might be distorted. A restriction from entry of new firms in the industry and regulation of the business organization helps to monitor competition.
Recommend a pricing policy for the business you chose. Assess how your pricing policy maximizes profits for the business. Provide support for your rationale.
Today all consumers are entitled to access important information about the products and their prices. Consumers already know the prices of most health products and quality of the automobiles, and the advance effects on their use. Thus it is very difficult for the investors in this industry to deceive consumers about the price and quality of products (United States, 2009).
Many consumers nowadays get access to health care through many agents like insures or plans chosen by their employers, their employers, and other providers who guide consumers on choice of the treatment and refer them to the best health services (Austin, Hungerford, & Library of Congress, 2009).
The report gotten from the American medical association is that many health insurance firms are playing a great role in provision of services to many Americans. Health maintenance organization (HMO), preferred provider organization (PPO) and Point-of-service (POS) market shares were divided by different companies in USA. One of the insurers had taken almost 50% of the market shares while another had taken 30% of the market shares. The main competitors in the industry are; Humana (HUM), Cigna (CI), WellPoint (WLP), UnitedHealth Group (UNH), Aetna (AET) and Blue shield which had major contribution and which had large shares in the industry (Austin, Hungerford, & Library of Congress, 2009).
This industry should adopt a payment method which provides incentives to the providers to enable them improve quality, innovate and lower costs; this is a powerful force to increase competition in the market. Today most payments to the insurers have no connection with the health care quality provided. If the interests and incentives are compatible, then the better results yielded. Thus this will lower the price (United States, 2009).
Reference
Austin, D. A., Hungerford, T. L., & Library of Congress. (2009). The market structure of the health insurance industry. Washington, D.C.: Congressional Research Service.
Cournot oligopoly: Characterization and applications. (2005). Cambridge: Cambridge Univ Press.
Feldstein, P. J. (2011). Health policy issues: An economic perspective. Chicago: Health Administration Press.
Insurance newsweek. (1899). New York, etc: Vantage Enterprise, etc.
United States. (2009). Deceptive health insurance industry practices: Are consumers getting what they paid for? : Hearing before the Committee on Commerce, Science, and Transportation, United States Senate, One Hundred Eleventh Congress, first session. Washington: U.S. G.P.O.
University of Michigan. (1900). Meeting of Board of Regents. Ann Arbor, Mich: The Board.
Vives, X. (2001). Oligopoly pricing: Old ideas and new tools. Cambridge, Mass. [u.a.: MIT
Weiss, L. D. (1992). No benefit: Crisis in America's health insurance industry. Boulder: Westview Press.
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