Market Model Patterns of Change

Market Model Patterns of Change

ECO 550

January 26, 2012

THE INDUSTRY AND GENERAL PATTERN OF CHANGE OF MARKET MODEL

The health insurance industry in the United States is fast paced, and characterized by rapid growth. Health insurance providers are numerous, and choices plenty, representing a competitive marketplace where no single entity has much power over prices. However, the industry is undergoing a rapid transformation process and slowly evolving into an oligopoly, where only a few large firms will eventually control market dynamics.

Between 1998 and 2008, there were more than 500 mergers involving health insurers [ (Bakhtiari, 2010) ]. Although there are hundreds of small insurance companies operating in the market, the industry Led by WellPoint, 12 health plans cover two-thirds of the enrollment in the U.S. commercial-insurance market [ (Bloomberg News, 2010) ]. An analyst's report predicts that 100 insurers with 200,000 members or less could be pushed out of business, as smaller insurers are increasingly unable to invest in the infrastructure and technology to effectively manage care [ (Bakhtiari, 2010) ]. However, mergers, rather than small insurers going out of business, have been the main driver.

SHORT AND LONG RUN BEHAVIORS OF IN A "MARKET ECONOMY"

While there is no single theory that explains oligopoly behavior, for this paper, the Kinked-Demand theory of Oligopoly is used. The kinked demand model assumes that if one firm raises its prices, other firms will ignore the increase, while other firms in the industry will match any price cuts. The result is a demand curve for the firm that is kinked at the current equilibrium price [ (Department of Economics) ]. Taking the assumption into consideration, a single firm which tries to raise price will be left in the dark by the other firms and will lose market share, suffering a huge loss in demand because its competitors’ prices remain low. Conversely, a single firm that cuts prices will...