Question

Describe hospitals transition to price competition?

Describe hospital price competition in theory and practice?

Answer 1

Price competition arises when hospitals try to sell their services at lower prices than their peers. Because of greater level of competition, hospitals will try to reduce their prices in order to attract more number of customers. Thus they try to reduce their prices and overall costs, increase insurance coverage and bring in as many customers as possible in order to maximise profits and gain economies of scale.  

Thus in theory due to increased competition, with saturation in the market share and more number of hospitals coming up in the region, the price competition will tend to increase, leading to lower prices and lower profit margins for each and every hospital in the region.

However, in practice, price competition is rarely what one predicts in theory. Well renowned hospitals continue to charge the same rate even if new hospitals come up in those regions because of quality healthcare, facilities and good set of doctors. In some countries especially in developing markets, these hospitals charge exorbitant rates, no matter how many new hospitals come up in those regions as they get to limit the quality of patients coming in to their hospitals and get to gain as much revenue as possible because old and renowned hospitals with experienced set of doctors are able to charge much more without worrying about the level of competition.