Oligopoly in Terms of the Us Health Insurance Industry

Only available on StudyMode
  • Download(s) : 51
  • Published : November 12, 2012
Open Document
Text Preview
Sardor Yuldashev, WIUT, Economics with Finance, 2011

Content
1.Introduction3
2.Competition in the US health insurance industry3
3.Analysis of the US health insurance market structure7
4.Strategies oligopoly firms use8
4.1.Collusions, mergers and acquisitions8
4.2.First-mover advantage9
4.3.Punishment strategy10
5.Pricing strategy and recommendations11
6.Conclusion12
7.Appendix13
8.Bibliography14

Introduction

The purpose of the coursework is to undertake a critical analysis and an assessment of the level of competition in the insurance industry of the country of our choice. In my case, I have decided to explore the health insurance industry of the United States. One of our aims is to determine and discuss the market structure and the change in the level of competition in the sub-sector. We are expected to discuss different strategies, such as first-mover advantage, punishment and collusion, companies use in order to be successful in the industry for maximizing their profits and earning desirable market share. In addition to this, we need to analyze pricing strategy the insurers use and give relevant suggestions considering the nature of the market.

Competition in the US health insurance industry

Insurance markets are considered as sufficiently competitive in the US, especially in healthcare. However, it does not mean that the industry is perfectly competitive. Compared to production of the other types of insurers, health insurance sub-industry products are less homogeneous, which derives our attention to its unusual market structure. Even though there is an intense competition in the sub-industry, barriers to entry are still high with soaring market concentration year by year as has been examined by many. In fact, we can even observe an existence of market dominants in certain geographic areas. These factors, to some extent, place us in a very interesting position, and therefore we rely on a critical analysis, of which I will try to conduct in a more detailed way in this section of my paper. First of all, I have to mention the fact that the US insurance industry is regulated at the state level, and regulation across the states varies significantly. This is one of the main reasons which contradict an existence of an intense competition, which exists within the country, but definitely not statewide. In other words, highly regulated state insurance markets make competition less intense and therefore, highly concentrated. This can be observed on the first Appendix table, “Insurance Market Concentration: Ranked List (2007)”, provided by American Medical Association (AMA) and below given chart, by the Universities of Georgia and Connecticut professors, which shows Hirschman-Herfindahl index (HHI) estimated nationwide and statewide. Below chart demonstrates that interesting position we are in, where we have to HH indices (Hillard et al., 2008). But from this, we can derive a very clear, and accurate I believe, assumption that the US health insurers strive to take over statewide markets rather than dominating nationwide. [pic]

Based on the revenues of all operating insurers, the chart shows the range of approximately 250 – 550, where HHI indicates that unconcentrated nationwide health insurance market was increased over the given years. Nevertheless, average state HHI shows the market has extensively driven into highly concentrated zone over the years. From this we can obtain a premise for previously given fact that rigorous regulations make insurers to pull out from the market. According to a nationwide survey by the Government Accountability Office, the median statewide market share of the largest insurer selling coverage to small business groups, which are small employer groups, increased from 33 percent in 2002 to 47 percent in 2008. [pic]

It means that some small firms have been driven out of the market thus leading market share of largest firms to increase. It...
tracking img