Question

Answer the following questions about competition among hospitals. (Questions) (a) Suppose there are four hospitals in a market. Hospital. 1) has a market share of 30%. Hospital. 2) has a market share of 25%. Hospital. 3) Has a market share of 25%, and Hospital #4 has a market share of 20%. Calculate the Herfindahl-Hirschman Index for this market. (b) In words, explain what the Herfindahl-Hirschman Index is supposed to measure? (c) There can be pros and cons of having market concentration in the hospital industry, which arises when a small number of hospitals have large market shares. For the five concepts in the table below, classify each concept as a reason to FAVOR or OPPOSE barriers to entry into hospital markets. Defend each classification with an explanation.

Answer 1

The Herfindahl-Hirschman Index (HHI) for the given market is 0.255, indicating moderate competition. Market concentration in the hospital industry can have pros (economies of scale, better coordination) and cons (higher prices, reduced quality).

Step-by-step explanation:

a) Calculation:

First, we need to square the market shares of each hospital:

• Hospital 1: (0.30)^2 = 0.09
• Hospital 2: (0.25)^2 = 0.0625
• Hospital 3: (0.25)^2 = 0.0625
• Hospital 4: (0.20)^2 = 0.04

Next, we sum the squared market shares:

HHI = 0.09 + 0.0625 + 0.0625 + 0.04 = 0.255

b) Explanation of HHI:

The Herfindahl-Hirschman Index (HHI) measures market concentration by summing the squared market shares of all firms in the market. It provides a numerical value that reflects the degree of competition in the market. In this case, the HHI is 0.255, indicating moderate competition.

c) Pros and Cons of Market Concentration:

• Pros of having market concentration in the hospital industry: 1) Economies of scale can lower costs and improve efficiency. 2) Concentration can lead to better coordination of healthcare services.
• Cons of having market concentration in the hospital industry: 1) Limited competition can result in higher prices for healthcare services. 2) Lack of choice and reduced quality of services may occur.