Hi there. In this video, as well as the next one, the focus is on another precondition that is crucial for achieving efficiency in competitive health care markets, effective competition regulation. We will first have a look at the basic principles of this type of regulation, after which at the end of this video, it's relevance for competitive health care market is highlighted. Only when markets function properly, consumers benefit from competition in terms of lower prices, higher quality, more choice, and increased innovation. This however, doesn't come naturally because it is typically not in the interests of sellers to preserve competition. Sometimes, firms try to limit competition to increase their profits at the expense of consumers. Therefore, a set of rules is needed to guarantee fair competition. These set of rules aimed at preventing and when relevant, correcting anti-competitive behavior is referred to as competition regulation or competition policy. Overall, three important rules apply to firms in competitive markets. First, firms may not engage in anti-competitive agreements. Second, firms may not abuse a dominant position. Third, firms need permission if they want to merge. Let's start with the prohibition on anti-competitive agreements, also called the prohibition on cartels. Agreements among firms are deemed anti-competitive when these prevent, restrict, or distort competition within the market. As an illustration, I gave some hypothetical examples in the healthcare context. Foremost, in the absence of price regulation, health care providers are not allowed to fix prices. Providers such as hospitals are also not allowed to agree on production limits or capacity constraints in order to artificially create scarcity. Additionally, it is forbidden to agree on actions that prevent the entry of new competitors. As a last example, it is prohibited for healthcare providers to agree on market sharing, which occurs when they divide patients among themselves and does eliminate competition. Please note that by way of exception, anti-competitive agreements are allowed, one, if the positive effects exceeds the negative effects, and are passed on to the consumers, and second, when competition is not completely eliminated. In addition to engaging in anti-competitive agreements with their competitors, firms are also not allowed to abuse a dominant position on their own. Generally speaking, firms have a dominant position when they can afford it to behave independently of their competitors and consumers. For example, when a health insurer is able to impose unfair conditions on providers of healthcare because these would go bankrupt without the contract. Or as another example, when a hospital is able to charge unreasonable high prices because there are no nearby alternatives. In addition to the prohibitions on anti-competitive agreements and abuse of a dominant position, competition regulation also includes merger control. The reason for this is simple. Any merger leads to consolidation and can thus results in the creation or strengthening of a dominant position. To prevent this from happening, the likely competitive effects of a proposed merger need to be assessed by a competition authority prior to its confirmation. This holds for horizontal mergers, for example between hospitals A and B, or health insurance X and I, as well as vertical mergers. For example, between hospital A and health insurer X. Depending on the competition authorities findings, mergers are approved, prohibited, or approved subject to binding conditions or remedies. To conclude this video, some people question whether the general rules for fair competition should be enforced in healthcare as in any other industry. Isn't healthcare very different? Yes, of course. Markets for healthcare have unique attributes. But does that really matter for competition policy? In a nutshell, no. Basically, it doesn't. From the empirical literature, it clearly follows that also in healthcare, anti-competitive behavior is not socially beneficial. When competitive markets are used for safe guarding the public healthcare goals, sufficient competitive pressure is crucially important. This simply implies the importance of effective competition regulation. However, as we will discover in the next video, that is easier said than done.
