Question

Assume that a hospital is a profit maximizing firm and is a local monopoly. It accepts a mix of privately insured and public patients (i.e. patients who are in public insurance programs such as Medicare and Medicaid). The private sector faces a downward sloping demand curve, and the public sector faces a fixed regulated government price.

Suppose government changes its policy to reduce the reimbursement (i.e. the government price) to hospitals.

Use the economic model of price discrimination to show graphically what happens to (a) price faced by privately insured patients, (b) access for privately insured patients (i.e. the number of privately insured patients accepted by the hospital) and (c) access for public patients (i.e. the number of public patients accepted by the hospital).

Answer 1

there are two types of consumer/buyer/patient available to the hosp\ital which is having a monopoly in that market. In that situation, both of the types are insured. the government-insured patients are having fixed prices whereas privately insured patients follow a normal demand price relationship.

Let us assume that monopolist will sell his product in two segregate markets. each of the different demand curve with different elasticity. So in the given figure D1 is high price elasticity as it is representing the private patient, D2 is less elastic representing the publicly insured patient. The aggregate marginal curve is the horizontal summation of MR1 and MR2curves. and the marginal cost is MC.

Now monopolist has to decide total service to be given to both of the types so that they can maximize his profit. The total quantity has been decided by the interaction of MR and MC at point E and output will be OX and combined price level at P. the total revenue generated by the monopolist OXAP.

the monopolist can gain more by discriminating prices.

So, in both market we want

MC=MR1 and MC=MR2

Sp, MR1=MR2=MC

So if MR is more in one market, then monopolist will sell more in that market (Private) and less to the other market (Public) until the above condition was fulfilled. if we draw a perpendicular from E to Y-axis this line will not MR1 at E1 and MR2 at E2.

so the discriminating monopoly will produceOX1 for market 1 and OX2 for market 2 and price level will be P1 for market 1 and PO2 for market2.

Hence, from the figure, we can see that by discriminating monopolist will gain because the sum of area OP1FX1 and OP2GX2 will be more than previous revenue OXAP.

It is always possible for an individual to get diversified with the help of negotiation on his offering price.