Markets, Part III: Barriers to entry

Recall that in the first post, I used widgets to show how markets can be self-correcting and result in benefits for everyone involved, without the need for government interference. I then identified five qualities of a market that make it work well.

In the second post, I explained why informational symmetry is a problem when it comes to markets for healthcare.

Now I'm going to briefly discuss barriers to entry. High barriers to entry, if you'll recall from the first post about widgets, mean that new competition has trouble entering the market. This could mean a new competitor (such as Wally, who started Wally's Widget Emporium,) or it could just mean that existing competitors have trouble entering another portion of the market (e.g. geographical.) There are many potential barriers to entry.

Barriers to entry are, generally speaking, bad for competition--as the widget example showed. They lead to inefficiency and create the potential for exploitation. In the worst case, they permit and perpetuate monopolies. Markets for healthcare services are not unusually affected by these barriers, however--which is why this won't be a long involved post.

• Some barriers to entry serve useful purposes. One reason I can't start up my own airline is that there are lots and lots of regulations regarding equipment, training, maintenance, etc. etc. etc. That's kind of a good thing.
• Some barriers to entry we can't do much about because they are inherent to the enterprise. To become a car manufacturer (at least, one that competes with the big makers), one needs tons of expertise, tons of experience, a lot of money, etc., etc.
• Some barriers to entry are erected intentionally (though not uncontroversially). For example, governments usually impose tariffs on imports precisely for the purpose of limiting foreign competition.

The barriers we care most about--the ones we should ameliorate through government--are those that (1) inhibit competition (are 'anti-competitive') and (2) don't give us enough in return. If Microsoft bundles Internet Explorer with Windows, it's very hard for a potential browser-maker to break in--leaving us with an inferior product for much longer than would otherwise be the case! On the other hand, the bundling was, in some senses, an advantage for consumers.

There's probably nothing special about healthcare when it comes to anticompetitive practices, so I won't spend any more time on this section. There are certainly some very large insurers, and some very large hospital groups, that wield 800-lb gorilla-type power in markets. In Massachusetts, there's all sorts of consternation over the one I work in, and the Atty General keeps a close eye on its practices. Any large-scale changes in the delivery system will have to continue to allow policing of the markets.

But my project here is to explain the limitations of unfettered markets when it comes to healthcare. Okay, let me post this, so I can get on to the more interesting parts of the series!