The Market for Medical Services and Physicians: An Application of Hedonic Price Theory

Abstract

Without disputing the importance of the 'special characteristics' found in the market for medical services, it is argued in this paper that the standard economic model of maximizing behaviour, rather than an idiosyncratic theoretical formulation unique to the medical profession, is well suited to this market. This conclusion is based on analysis in which the technique of equalizing differences is used to define a competitive equilibrium that provides the possibility of both price and non-price competition. The maximizing model developed provides an alternative theoretical explanation of the limit placed on supplier-induced demand to that offered by the target-income model of physician behaviour or that offered by the arguments based on medical ethics. Le marche des soins et des medecins: une application de la theorie des prix hedoniques. Sans remettre en question l'importance des 'caracteristiques particulieres' du march6 des soins, l'auteur suggere que le modele traditionnel de comportement de maximisation est applicable a ce march6 et un substitut preferable aux formulations theoriques specifiquements dessinees pour la profession medicale. L'auteur derive cette conclusion d'une analyse dans laquelle la technique des diff6rences egalisantes est utilisee pour definir un equilibre concurrentiel qui accommode la concurrence par les prix mais aussi par d'autres moyens. Le modele de comportement de maximisation qui est developpe fournit une explication th6orique de rechange pour la limite placee sur la demande engendree par le producteur; les autres explications ont ete fournies par des modeles de comportement du medecin tentant de se donner acces a un revenu-cible ou encore par des explications fondees sur l'ethique medicale. The market for medical care is distinct from that for other commodities, since medical services are often non-transferable once purchased (Kessel, 1958; Pauly, 1978), and consumers frequently find it difficult to evaluate medical services (Evans, 1974). These characteristics of the medical market and the observation that physician density and both physician fees and services are positively associated have encouraged the assertion that physicians control demand (Sloan and Feldman, 1978). Although Research assistance by Franca Pastro and Mary Stafford is gratefully acknowledged. Financial assistance for this research was provided by the British Columbia Youth Employment program, the University of Alberta's Central Research Fund, and the President's Research Grant from Simon Fraser University. In addition, I am grateful for the comments made by Chris Hall, Terry Heaps, David Ryan, seminar participants at the University of Alberta, and two anonymous referees. Canadian Journal of Economics Revue canadienne d'Economique, xviii, No. 2 May 1985. Printed in Canada Imprime au Canada 0008-4085 / 85 / 377-94 $1.50 C) Canadian Economics Association This content downloaded from 157.55.39.144 on Mon, 25 Jul 2016 03:48:21 UTC All use subject to http://about.jstor.org/terms