A Siemens Divestment Could Renew Market Competition

Amyn M. Amlani, PhD

Amyn M. Amlani, PhD, is today’s guest blogger at Hearing Economics.  Dr. Amlani’s work is a rare combination of Audiology and Economics which has moved our profession forward and expanded our thinking in recent years.  He first introduced us to the concept of Price Elasticity of Demand back in 2007.

Dr. Amlani continues to walk the walk and talk the talk, much to the benefit of our profession and the hearing aid industry. Today he considers the effects of the proposed Siemens divestment of its hearing aid division, a topic that has generated a good deal of upper-echelon chatter in recent months.

A Transformed Siemens

Three years after Siemens’ intent to sell its hearing aid division failed to attract a suitable bid, the company recently announced its re-intent to divest its audiology division. The May 2014 announcement revealed that the company is preparing to go public with this division. This announcement hints at Siemens listing the audiology division either as:

1.  on the stock exchange as a separate company in form of a spin-off, where every Siemens shareholder will receive shares of Siemens audiology business, or
2.  as an initial publicly offering (IPO) of company shares of stock  to the general public.{{1}}[[1]] Lindsey H. (2014). Going Public: Two paths for Siemens audiology, experts say. Hearing Journal, 67 (7), 32.[[1]]

The IPO process would afford Siemens the opportunity to transform the audiology division into a public company through raised capital, resulting in the new company, again, becoming a competitor in the manufacturing of hearing aids.

Could be Good News for Audiologists and Dispensers

The presence of a transformed Siemens company supplying devices in the hearing aid market is important to dispensers and the patients we serve. Siemens’ market share in the hearing aid industry declined considerably after 2008, which means that dispensers bought their products primarily from a smaller cohort of competitor manufacturers in the market.

The reduction in market share by Siemens in the hearing aid during this period is denoted in Figure 1 by the solid black line labeled S1. Because of fewer suppliers in the market (i.e., less competition), the remaining hearing aid manufacturers could charge dispensers a higher wholesale price per unit. This is depicted in Figure 1 by the gray dotted line intersecting at P1, Q1. This higher wholesale cost of the device, plus the time associated with providing audiological services, is then passed onto the patient.

Now assume that Siemens acquires funding and restructures itself. As the transformed Siemens begins to supply devices to the market, there is an increase in competition at the manufacturer (i.e., supply) level. This increase in supply will cause wholesale prices to fall, given that the dispenser now has the option of selecting from an increase in devices available.

Figure 1 shows this increase in supply as a blue solid line labeled as S2, and the resulting wholesale price decrease at the intersection of P2, Q2. The yellow triangle, in Figure 1, symbolizes the magnitude of the price reduction between the old Siemens and the transformed Siemens created by increased manufacturer competition.

How Supply Side Influences Retail Pricing

Historically, wholesale price reductions resulting from increased manufacturer competition have not benefited the patient. That is, most dispensers have either retained the increased profit from the reduction in wholesale price or applied the reduction in wholesale price incorrectly to the retail side.

For the latter, reducing the price of economy line hearing aids will not grow the market given that the demand for these devices is inelastic (i.e., price insensitive).{{2}}[[2]]Amlani AM & De Silva DG. (2005). Effects of business cycles and FDA intervention on the hearing aid industry. American Journal of Audiology, 14(1): 71-79.[[2]] Instead, dispensers should reduce the price of higher-end devices, which tend to have an elastic demand (i.e., price sensitive). Doing so will result in slightly greater quantities of high-end devices being dispensed and, inherently, a subsequent increase in total revenue.{{3}}[[3]]Amlani AM. (2009). It’s not immoral to increase hearing aid prices in an inelastic market. Hearing Review, 16(1), 12, 14, 16.[[3]]

Amyn M. Amlani, Ph.D., is an Associate Professor on the faculty of the Department of Speech and Hearing Sciences, University of North Texas. Dr. Amlani holds the B.A. degree in Communication Disorders from the University of the Pacific, the M.S. degree in Audiology from Purdue University, and the Ph.D. degree in Audiology/Psychoacoustics (minor in Marketing and Supply Chain Management) from Michigan State University. His research interests include the influence of hearing aid technology on speech and music, and economic and marketing trends within the hearing aid industry.  E-mail: [email protected]

feature image courtesy of The Telegraph