Market_Models_Patterns_of_Change

THE INDUSTRY AND GENERAL PATTERN OF CHANGE OF MARKET MODEL In the United States, the health insurance industry is fast paced and characterized by rapid growth. There are several health insurance providers which represents a competitive marketplace where no single entity has much power over prices. However, the industry is undergoing a rapid transformation process and slowly evolving into an oligopoly, where only a few large firms will eventually control market dynamics. Between 1998 and 2008, there were more than 500 mergers involving health insurers (Bakhtiari, 2010). Although there are hundreds of small insurance companies operating in the market, the industry Led by WellPoint, 12 health plans cover two-thirds of the enrollment in the U.S. commercial-insurance market (Bloomberg News, 2010). An analyst's report predicts that 100 insurers with 200,000 members or less could be pushed out of business, as smaller insurers are increasingly unable to invest in the infrastructure and technology to effectively manage care (Bakhtiari, 2010). However, mergers, rather than small insurers going out of business, have been the main driver. SHORT AND LONG RUN BEHAVIORS OF IN A "MARKET ECONOMY" In this paper, the Kinked-Demand theory of Oligopoly is used. The reason being is that there is no single theory that explains oligopoly behavior. The kinked-demand model assumes that if one firm raises its prices, some firms will ignore the increase, while others in the same industry will match any price cuts. This results in a demand curve for the firm that is kinked at the current equilibrium price (Department of Economics). Therefore, taking this assumption into consideration, a single firm which tries to raise price will be left in the dark by the other firms and will lose market share, suffering a huge loss in demand because its competitors’ prices remain low. Conversely, a single firm that cuts prices will only see a small increase in demand and no increase in market share, as its entire competitors match the price reduction. As a result, a firm will have a kinked-demand curve. The curve will be flat above the current price, since a price hike results in a loss of market share. The curve will be steep below the current price, since a price reduction results in no increase in market share. Changes in cost do not impact output and prices, as long as marginal cost remains in the vertical portion of marginal revenue.