Price Discrimination

Price discrimination is common in healthcare, as it is in other industries. Price discrimination refers to charging different customers different prices for the same product. Price discrimination makes sense if different custom- ers have different price elasticities of demand and if resale of the product by customers is not possible. Most healthcare providers and their products meet these criteria. Healthcare providers contract with an array of individuals and insurance plans. The price sensitivities of those purchasers differ widely, and services can seldom be resold. So, profit-maximizing healthcare firms will want to explore opportunities for price discrimination (or more politely, dif- ferent discounts for different customers).

Price discrimination can increase profits. Suppose half your customers (group A) have price elasticities of −3.00 and half (group B) have price elas- ticities of −6.00. The demand curve for group A is 16,000 − 800 × Price, and the demand curve for group B is 16,000 − 1,045 × Price. (You can verify that the group A elasticity is −3.00 at a price of $15.00 and the group B elasticity is −6.00 at a price of $12.00.) Your average and incremental costs are $10. In setting prices you could use the average price elasticity of demand (−4.50) and charge everyone $12.86. Or you could charge group A $12.00 and charge group B $15.00 (which is what the marginal cost pricing model tells us to do).

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