1. "Imperfect agency" refers to a situation where an agent may fail to select (or recommend) a course of action that the principal would have selected with the same information (expertise) as the agent. Robinson argues that it is not possible to construct perfectly "incentive compatible" contractual arrangements for payment from a principal to an agent (i.e., contract terms that would incentivize a self-interested agent to act as a perfect agent). Briefly summarize the 'incentive compatibility" issues the following contractual arrangements:
a. Fee-for-service payment
b. Capitation
2. When a product has a single seller (monopoly), the price charged for the product will tend to be higher than the price would have been under more competitive market conditions. When a product has a single buyer (monopsony)the price paid for the product will tend to be lower than the price would have been under more competitive market conditions. From the perspective of economic efficiency, how might lower prices associated with monopsony result in inefficient resource allocation?
3. Suppose there currently are four hospitals within a hospital services market area. The current market share for each hospital is indicated below:
HospitalShare
A 40
B 20
C 10
D 30
a. What is the value of the Herfindahl-Hirschman Index (HHI) for this market?
b. Suppose Hospital A acquires Hospital C - what is the post-acquisition HHI?
c. Free-standing ambulatory surgery centers not owned by hospitals account for a highvolume of outpatient surgeries in this area. Qualitatively, how would accounting for these entities affect your answers for the HHI measures in parts 'a' and 'b' above?
4. Price discrimination refers to the practice of charging different individuals (or groups of individuals) different prices for the SAME product.
a. Provide an example of price discrimination.
b. What conditions are required for price discrimination to be feasible?
c. Why might price discrimination increase profits for a price-discriminating firm, compared to a uniform pricing policy?