Question

Background: Carolina HeartCare (CHC) plans to spend $6 million to transform 6 recreational vehicles (rv’s) into health labs. The rv’s will tour the Carolinas offering a $99 heart-health workup to anybody who wants one. The workup consists of a detailed questionnaire and some basic diagnostics (blood pressure, ultrasound of the ankle (yep, ankle), cholesterol test, etc). Using the information from the questionnaire and the diagnostics, a statistical analysis will determine the customer’s risk of a heart “malfunction” in the next year, the next three years, and the next five years. Similar question-based analyses are free online; expensive diagnostic-based analyses are available from doctors; CHC merges the two. None of the statistical analyses can outperform a coin-flip.

Currently, the mobile diagnostic health market is characterized by excess capacity—similar (albeit non-brand-name) machines to CHC’s are in airports, Walgreens, shopping malls, etc. Should RuralRx expect their competition to behave like Cournot or Bertrand? Explain your logic.

Answer 1

Ans.

Rural Rx should expect their competition to behave like Bertrand . In Bertrand oligopoly market competing companies independently choose the price at which to sell the products.The market demand at this price determines quantity supplied. So each company has to consider the expected price of the competitors products.The company that chooses the lowest price serves the entire market.However in Cournot competition competing companies independently choose a quantity to produce .The total quantity supplied by all firms then determines the market price. Each company has to consider the expected quantity supplied by the competitor to maximize their profits.

In this case of health market , the Rural Rx will consider the expected price of the competitor and keep its prices lower to serve the entire market. As the same machines are available in airports, Walgreens and shopping malls etc. So according to the demand in market at this price of $99 heart health workup will determine the quantity supplied. The competing company with lowest price will have more market share.