Tuesday, June 7, 2011
Posted by D. Daniel Sokol
Morten Hviid, University of East Anglia - Centre for Competition Policy (CCP) and Ruth Hancock, University of Essex - Department of Health and Human Sciences provide an example of Buyer Power and Price Discrimination: The Case of the UK Care Home Market.
ABSTRACT: UK Local Authorities purchase care home places on behalf of a large group of people following an assessment of their ability to meet the care home fee from their income and wealth. All other buyers of care home services are atomistic and the care home market is characterised by a large number of relatively small providers. This may give local authorities buyer power. We show the consequences of substantial buyer power by one consumer when sellers are competitive but each faces capacity constraints. In the free entry equilibrium we show that any abuse of this buyer power may lead to part of the market, “the squeezed middle” not being served. We use a microsimulation model to quantify the size of the squeezed middle and assess the implications of the form of the assessment of people’s ability to meet care home fees, for local authorities’ ability to exercise buyer power.