SUPPLIER INDUCED DEMAND

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SUPPLIER INDUCED DEMAND
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The Hypothesis

• Providers take advantage of superior knowledge to
  influence demand
• increases their income
• Imperfect agency
• providers (agents) self-interest in conflict
  with patients (principles)
• Avoid moral judgments here
• providers are only responding to the incentives
  they face

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Roemers Law

• A bed built is a bed filled
• Strong correlation between availability of beds
  and utilization
• The post hoc fallacy
• confuses movement along demand curve with shift
  in supply

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The Fallacy Demonstrated
Roemers Law
Alternative Scenario
S1
S1

D2
D

S2
S2
D1
0
0
Q1
Q2
Beds
Q1
Q2
Beds
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A Model of SID

• Starts with an exogenous increase in supply of
  physicians
• With inelastic demand, expenditures on physicians
  (and so their incomes) fall
• Physicians react by inducing demand

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Graphical Representation of SID
S1
D2


S2
D1
S1
S2
D
P1
P1
P2
0
0
Q1
Q2
Q1
Q2
Physicians
Physicians
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Empirical Support for SID

• Studies found correlations between quantity of
  physicians and consumption of physician services

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Problems with Empirical Support for SID

• Consistent with SID, but also with non-SID

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S1
D

S2
0
Q1
Q2
Physicians
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More Problems with Empirical Support

• Increases in physician demand can increase
  through non-SID pathways
• reduces travel time
• reduces waiting time
• improves quality of care

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Theoretical Problems with the Model

• Why wait for supply shift to induce demand?
• Not consistent with meaning of supply

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Target Income Model

• Physicians increase fees and quantity of
  treatments when fees fall in order to maintain a
  target income
• Assumes untapped monopoly opportunity
• Implies physicians would not worry about cost
  increases like malpractice premiums

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Limits to SID

• Costly to induce demand
• Reputation costs
• Patient-physician relationship
• Not all consumers lack information
• Watchdog groups

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Recent Empirical Studies

• Physicians (who do not lack information)
  consumption no different
• Some studies have found evidence of SID but at
  very low levels