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Perfect Competition and the Cost of Healthcare

Introduction

Markets can be organized according to different competitive structures, including perfect competition, monopoly, imperfect competition, and oligopoly. Perfect competition is largely considered theoretical because it comprises certain features that may be impossible to replicate in the real world. Aside from the features of a perfectly competitive market, examining how firms in such a market determine the price and profit-maximizing output levels is essential. An understanding of how markets operate is necessary to formulate cost-cutting measures.

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Main body

Perfect competition denotes a market structure where many producers and consumers of a homogenous product. A large number of sellers means that none can arbitrarily set the market price (Pleatsikas, 2018). Additionally, the producers sell similar products, implying that a seller cannot gain an advantage over others by differentiating their product. Information is freely and readily available to everyone, referred to as information symmetry (Pleatsikas, 2018). For instance, a seller cannot benefit by obtaining raw material from a cheap source unknown by other traders.

Additionally, new firms are free to enter the market, while old ones are free to exit. There are no barriers, such as financial costs or legal constraints, which hinder entrance or exit. Perfectly competitive markets also lack controls, such as government regulation (Pleatsikas, 2018). For instance, the government cannot institute price ceilings in perfect competition. In summary, a perfectly competitive market is based on equity.

In a perfectly competitive market, the price and quantity-maximizing output levels are determined by market forces. Since sellers do not have any advantages over each other and the government does not interfere, the price is determined by the market itself. The interplay of demand and supply creates the equilibrium price and quantity. When sellers produce above the equilibrium point, there will be a surplus, and the market price will decrease (Pleatsikas, 2018). When they produce below the equilibrium point, there will be a shortage. Therefore, sellers will produce at the level where the quantity demanded matches the quantity supplied. Mathematically, the profit-maximizing output is reached when the marginal cost (the cost of producing an additional unit) equals the marginal revenue (the revenue generated by increasing sales by one unit).

The cost of healthcare in the US is extremely high, especially in contrast to other high-income countries. This high cost is attributed to labor, goods, and administrative costs (Papanicolas et al., 2018). If I were the Chief Financial Officer (CFO) of a large medical facility, I would aim to reduce the cost of administration. I would reduce excessive wages and benefits paid to corporate management. Managers, including the CEO and CFO, are paid too much money and given too many benefits, thereby inflating the overall cost (Papanicolas et al., 2018). I would also decrease doctors’ salaries because research shows that physicians in the US are overpaid (Papanicolas et al., 2018). Aside from salaries, I would also decrease the number of financial resources spent on coordinating care. For instance, some meetings increase the cost of care despite being unnecessary and unproductive. Another cost-cutting measure is embracing technology to make certain processes more efficient. For instance, technology can reduce turnaround time and help streamline the processing of claims. Cumulatively, these actions will have the effect of decreasing the cost of care.

Conclusion

In conclusion, a perfectly competitive market structure comprises a large number of buyers and sellers. The price and quantity to be produced are determined by demand and supply market forces. This is because no seller can make a profit by differentiating themselves or their product. In the United States, the cost of healthcare has been rising to unmanageable levels in recent years. Directors of medical facilities can decrease this cost by lowering their administration costs.

References

Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018). Health care spending in the United States and other high-income countries. JAMA, 319(10), 1024-1039. Web.

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Pleatsikas C. (2018) Perfect competition. In M. Augier. & D.J. Teece (Eds.), The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan, pp. 19-28. Web.

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StudyCorgi. 2022. "Perfect Competition and the Cost of Healthcare." October 17, 2022. https://studycorgi.com/perfect-competition-and-the-cost-of-healthcare/.

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StudyCorgi. (2022) 'Perfect Competition and the Cost of Healthcare'. 17 October.

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