Thursday, December 22, 2011

Market Structures

Markets need a variety of factors to work in concert in order to be a "free market" that we lionize so well in everyday political discourse (e.g. "market-based solutions"). In short, they need a "structure". Academic economists tend to use the word “competitive” as a short hand for the confluence of factors that are needed to keep a market economy running smoothly as our 101 textbooks promise. On the microeconomic level, a “competitive” market structure has enough consumers and producers so that no one market actor can influence the market overall, has reasonably few and minimal barriers to entry and exit to the market, and both consumers and producers have the voluntary choice whether or not to enter a transaction or contract.

There are more wrinkles that what I've outlined above, of course, but they're not particularly pertinent to the issues raised by the Altarum Institute Center for Consumer Choice in Health Care latest survey comparing how much effort we devote to shopping for doctors versus shopping for appliances or cars. As the Washington Post's Sarah Kiff explains “appliances and cars, it turns out, get a lot more attention.”

This is at the heart of why the healthcare market in the United States (or to my knowledge, anywhere for that matter) is specifically unsuited for purely “free market-based solutions”; consumers do not have the ability to make “rational” decisions.

First, a few qualifiers: I use quotes because I mean rational in the economic sense. I do not mean to imply that people cannot be rational when they consume healthcare, but that the inelasticities of demand for essential care, combined with lack of pricing transparency, makes forming a “rational” choice while shopping for healthcare “products” - like a heart surgeon or hearing aids - an unrealistic expectation for consumers. I also don't mean to say that there's no space at all for market forces in healthcare policy. Quite the opposite, markets are have an excellent track record on decreasing costs and increasing availability of elective treatments and techniques (e.g. Lasik , gastric bypass procedures, Viagra). But these market success are constrained to a specific basket of medical procedures and goods that we would consider elective. This gives consumers time to compare prices, quality and alternative treatments. Consumers don't have this luxury at the onset of a heart attack or the outbreak of an infectious disease.

As Kiff elaborates:
Shopping for a doctor is a lot harder than shopping for a dishwasher. There’s no price tag for what you’ll pay, or a Consumer Report to reference on quality.
Representatives and pundits who spend their air and ink extolling on the the virtues of markets often have little understanding of their composition. This does damage to both our country and policy discourse.

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