Question

In: Finance

Suppose that a hospital monopolizes the local market for heart surgery, charging $10,000 per procedure. The...

Suppose that a hospital monopolizes the local market for heart surgery, charging $10,000 per procedure. The hospital does 1,000 heart surgeries annually and the cost of heart surgery is $5,000 per procedure.
The hospital is duopolistic in the market for cataract surgery. The hospital and its competitor both perform 2,000 cataract procedures annually, charge $2,000 per procedure, and have costs of $1,000 per procedure.
The hospital plans to go to insurers and offer a bundled price. It will discount the price of heart surgery below $10,000 and hold the price of cataract surgery at $2,000 provided that it is given exclusivity in the cataract market.
What price for heart surgery must the hospital charge to ensure that its competitor cannot profitably compete in the cataract market? (Assume that the hospital would match its rival’s price in the cataract market if the rival were to respond to this bundling arrangement by cutting its price for cataract surgery.)

Solutions

Expert Solution

From the given data we can find out how much contribution/profit can be earned from both the surgeries as tabulated below

Particulars Cataract Heart Surgery
Total Surgeries 2000 1000
Price 2000 10000
Cost 1000 5000
Contribution        20,00,000            50,00,000

Here cost for doing a cataract surgery is $1000 hence when first hospital reduces the price of cataract to $1000 then the second rival firm cannot sustain because it cannot make profits but as mentioned in the question we cannot change the price of cataract surgery hence we will adjust that price in heart surgery. Accordingly

Let us find out how much does it cost to the first hospital to reduce the price to $1000.

= 1000(Loss) multiplied by 2000 Surgeries

= 20,00,000$

Now we have to adjust loss in the price of each heart surgery

Hence 20,00,000( loss) Divided by 1000 heart surgeries

= 20,00,000/1000 = $2000

Hence the price to be fixed for heart surgery will be $10000-$2000 = $ 8000

Hence the final Bundled price will be $8000 ( heart surgery) + $2000 ( Cataract) = $ 10000

jeff jeffy answered 2 years ago
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