Attention Miss Professor

Market Structure and Pricing Power

Hiara Custodio

University of Phoenix

Professor

Introduction

A Recent report by the Center for Disease Control showed that 65 % of all Americans have a cover under the private insurance. There are specific public programs that complement the services provided by the private health industry. Public programs include social insurance for the disabled, Medicare, and Medicaid.

The federal government in conjunction with state governments funds the programs. Private health insurance in the United States forms a fundamental in the country`s health care industry. Most Americans have taken medical cover under the private insurance system.

Market Structure

An oligopoly is a distinct market structure where only a few firms have overshadowed others and take a huge market share. Very few firms dominate, though the market presence of other small players may exist. The market, in this case, is communally jointed to a few firms, and it is thus competitive. For the case of United States, major health care insurances such as Aetna and Anthem operate with minimal competition. However, there are many smaller independent plans dedicated to physically challenged people to offer specialty services. An example of an insurance service that has dominated this market is the Blue shield blue cross Permanente insurance plan.

The program evolved from Blue shield blue cross industrial companies and was later on listed for public enrollment. It is important to examine outcomes of different quality measures on the demand for insurance products in the market.

Hypothetical analysis of the plan

The plan will use some variables as controls. The value of this plan will increase as a number of people enrolled increases. The program type variables are PPO and HMO, and both of them offer broad networks. The two plans are relatively not communicated within the consumer base, so many enrollees may show less familiarity. Deductibles and out of pocket expenses significantly limit changes. The variations have an influence on demand. A deductible has to be paid before actual coverage, hence high deductibles are much undesirable. Patients will prefer plans that have some form of cost limit and have lower deductibles. Research has shown that plans that have a significant number of plan offerings will always hold better value in the market.

Elasticity of the insurance offered

In estimating the elasticity of the insurance service, there are several key approaches that researchers can adopt. The most significant method is through the application of distinctions on the premiums in a bid to identify the price consideration that was taken into account. Alternatively, the researchers can use distinctions in tax ratios over states as a means of recognizing price elasticity in the insurance.

Most insurance plans contain many features that affect the payment by consumers, and they may also undergo changes. The out of pocket pay benefits are of particular importance in the markets where minor beneficiaries are enrolled into zero-premium plans. In this way, a large portion of the beneficiaries income will be spent on the out of pocket pay.

The demand has shown that the out of pocket pay may present particular importance in relation to the surplus. There is a difference between the amount paid to different plans countrywide. The government has a payment plan that gives health maintenance organization (HMO) plans more pay than the traditional Medicare. The PPO plan receives the highest amongst the plans. The demand for insurance is elastic since an increase in prices would lead to a decrease in number of subscribers (McCanne, 2010). An example is when HMO plan raises its prices. The effects are that they will lose customers and subsequently lose on profit generation. Elastic demand has helped shaped the industry and has motivated more firms to reduce the price.

Marginal Cost and Marginal Revenue

Marginal revenue as a statistic is calculated by dividing the difference in total revenue by the quantity change in output. It is clear that the marginal revenue tends to remain steady over a specific level of the production. The marginal revenue will then follow the law of decreasing returns so that it shows delay at some point. With increase in output, the health insurance firms require an increase in fees charged. The perfectly competitive companies will continue production until when the marginal revenue will equal the marginal cost. In case the marginal revenue exceeds the marginal cost, the HMO will have an opportunity to increase profits by cutting the prices. The lower prices will attract more subscribers and generate large revenue.

Strategies for developing product differentiation and market segmentation

Oligopolies have a definite advantage in the market and maintain a large market share. Their level of dominance makes it very costly for any rival wishing to capture their market share. The market presents many barriers to new entrants. In most cases, the incumbent in the market are continually developing strategies that will keep out any invading competition (Matthews, 2010). The insurance firms in this market can adopt a non-price strategy.

It is the most convenient since price competition will form a very destructive force. They will only have to seek consumer interest through sales promotions or offering low premiums. Loyalty schemes are an alternative non-pricing strategy in the insurance sector.

Alteration of fixed and variable cost to support the strategy

Mixed costs refer to costs that are directly connected to the product, and it has to be paid regardless of the amount sold. As for the fixed cost, they must be paid at the end of every month. In cases where consumers fail to purchase insurance plans, the company will still have to pay the physicians and staff. Variable costs changes with the amount of sold. The strategy will incorporate the variable cost factor by increasing plan premiums when consumers purchase more plans. Variable costs relate to materials and labor, which fluctuates with time.

Conclusion

Oligopolies have a tendency to implement very competitive approaches. There is a trend towards designing their strategies in ways that create advantages that are present in the more competitive market structures. Due to the fact that there are very few number of companies operating in the market, the firms have to implement marketing techniques that bring higher competitiveness. Oligopolists have shown dominance in the innovation of new products (Sonnenholzner, 2006).

The super profits they generate are useful in revolutionizing the sector, hence improved performance. Application of the described models will result in economic stability of the sector. Price stability will further benefit the consumers since they can easily plan ahead. Consumers that have a well-laid out plan have increased chances of controlling their expenses, which will increase the probability of them subscribing to insurance policies. Approaches that focus on the consumers will increase the number of subscribers and subsequently benefit the entire health insurance industry.

References

Investopedia. (n.d.). Oligopoly Definition | Investopedia. Retrieved April 18, 2016, from http://www.investopedia.com/terms/o/oligopoly.asp

Matthews, M. (2010, June 7). America's Coming Health Care Oligopoly. Retrieved April 18, 2016, from http://www.forbes.com/2010/07/07/healthcare-reform-insurance-hospitals-contributors-merrill-matthews-obamacare.html

McCanne, D. (2010, June 25). The private insurance oligopoly - PNHP's Official Blog. Retrieved April 18, 2016, from http://pnhp.org/blog/2010/06/25/the-private-insurance-oligopoly/

Sonnenholzner, M. (2006, September 13). Oligopoly in Insurance Markets - Encyclopedia of Actuarial Science - Sonnenholzner - Wiley Online Library. Retrieved April 18, 2016, from http://onlinelibrary.wiley.com/doi/10.1002/9780470012505.tao003/abstract