Microeconomic Analysis of Indian Medical Industry

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Source: ibef.org/ download/Healthcare-August-2015.pdf

The others category represent other organized players which have very highly fragmented market share distributed over even larger number of players.

Consequently, we have a market structure with fairly large number of sellers with small market shares, no collusion and independent action (owing to different speciality units they cater to).

Under these circumstances we end up having multiple top players in the industry with each of these have a relatively small market share giving us a monopolistic competition.

3. Market Structure Characteristics: Entry and Exit BarriersThere are virtually non-existent barriers to entry of new firms in India. This is due to a number of reasons:

1. Policy Support

- Encouraging policies for FDI and the private sector

- Reduction in customs duty and other taxes on life-saving equipment

- NRHM allocated USD10 billion for healthcare facilities

2. Innovation

- Expanding research & development and distribution facilities in India

- Use of modern technology

- Providing support to global projects from India

3. Increasing investments

- Rising FDI and private sector investments

- Lucrative M&A opportunities

- Foreign players setting R&D centres and hospitals

4. Market Structure Characteristics: Differentiated Product

The product of the seller, in this case, the speciality of a hospital, is differentiated in terms of the service they offer as their proposition. The differentiation is based on the ailment they aid in treatment of. The varying differentiations could be Heart Speciality, Cancer Speciality, Trauma centres and Neurology centres amongst others.

Some differentiate their proposition in terms of offering multiple speciality care at the same hospital. Within the same category of offering, the service is differentiated in terms of the quality of service offered gauged in terms of the doctors on their surgical and operational panel and the technological advancement in equipments being used by the hospital.

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5. Market Structure Characteristics: Pricing

Despite the relatively large number of competitors (hospitals), monopolistic competitors do have some control over the price range of services offered because of the product differentiation in terms of service category and quality of service that they are able to offer. If consumers prefer the service of a particular hospital due to their preference of the surgeon or some other rationale, then within limits they will pay more to satisfy their choice of hospital and doctor. This entails from the fact that treatments being offered at speciality hospitals pertain to high risk and life-and-death situations and are open to being leveraged under certain circumstances by these speciality hospitals.

Sellers (Hospitals) and buyers (the patient or his/her family) are not linked randomly, as in a purely competitive market. But the monopolistic competitor’s control over price is limited by the numerous potential substitute options existing and coming up due to almost absent entry and exit barriers. One such example could be the presence of Medanta, Fortis Escorts and Action Balaji’s services in the cardiology speciality treatments posing potential substitute options to each other.

Government’s subsidy offerings under the health schemes offered in the public sector jobs also limits the price control by the similar service speciality hospitals not covered under the scheme.

6. Short-run and Long-run EquilibriumWith the given demand, marginal revenue, and cost curves, a monopolistic competitor maximizes profit or minimizes loss by equating marginal revenue and marginal cost. If firms are earning economic profit in the short run, other firms will enter and produce the product, and they will continue to enter until all economic profits are eliminated.

Long-run equilibrium in a monopolistically competitive market is attained when the demand curve for each producer is tangent to the long-run average cost curve. Unrestricted entry and exit lead to this equilibrium. At the equilibrium output, price equals long-run average cost and marginal revenue equals long-run marginal cost.

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7. Market Structure: Efficiency

Monopolistic competition is exemplified by the monopoly power of individual firms as well as the production of firms below the ideal capacity. The market is highly competitive with more and more players trying to get into the industry, so as to reduce the monopoly power of individual companies until there is only normal profit present.

Initially in the introduction phase of speciality hospitals, the limited number of sellers enjoyed fair amount price premium-ness but with new entrants coming in the same service offerings, they had to cut prices or offer more lucrative treatment and healthcare packages to maintain its market share. Some hospitals, however, are still able to charge higher by differentiating on the basis of credibility of doctors on their panel.

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Current market situation for Speciality hospitals of India

8. ConclusionThus we see how the Speciality hospitals in India represent a monopolistic competition through multiple key players running the mill with small market shares. The different speciality hospitals are able to offer differentiated service functioning in the same core proposition of speciality treatment and healthcare industry with some control over price.

9. References

Books

[1] Managerial Economics, 9th Ed, Thomas, Maurice and Sarkar, Mc Graw Hill publications, 2010

[2] Economics, 17th Ed, Samuelson