Let’s Get Kinky: Government Regulation and the Supply Curve, Part 1

Last post looked at why different firms are Willing to Sell at different Price points — another way of saying that some firms can compete more and longer in a free market because their costs are lower and their margins are higher.  This was bad news for RR, who’d written a letter to the editor of a journal asking why he was at a selling disadvantage in his market, compared to Costco and the VA.  Recalling that our practices were likened to wheat farmers — Price Takers–the big farmers and big practices can survive when Price drops because they get their product (seed or hearing aids) at lower cost.  They have that advantage because it is cheaper for the seed company and the hearing aid company to sell a lot to one farmer/audiologist than it is to sell to a bunch of little farmers/audiologists.  The playing field is not level and RR is, indeed, at a disadvantage.  

Last post also brought up another source of market influence that tilts the playing field.  That source is Government, which is today’s topic.  Here’s the last row of Table 1 from that post, showing Sources that can and do shift Supply curves left (less Supplied) and right (more Supplied) for a given Price.

Non-Price Determinants of Supply

Effect

Supply Curve Shift

Government Taxes, Subsidies

Regulation

If business taxes increase, costs increase

If firm(s) receives government subsidy (e.g., VA), costs decrease

If FDA reduces regulation (e.g., PSAP position), lower costs, more competitors

Left — less willing to sell

Right — more willing to sell

Right — more willing to sell

Taxes

“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. ” Mark Twain

 Let’s start with the obvious and ubiquitous: Taxes.  There are lots of direct and indirect taxes on businesses (taxes on corporate profits, payroll taxes, municipal and state revenue taxes,  sales tax), all with the common feature that they raise the cost of doing business.  The tax effect spills over into increased cost of production/selling, which increases marginal costs, which means businesses are Willing to Sell less at a given Price.  Yadayadayada: the Supply Curve marches leftward.  Of course, a friendly Government intent on stimulating commerce may reduce business taxes, sending the Supply Curve rightward.  Regardless of your politics, these basic economic facts are reasons to vote. 

The playing field is not level for taxes. Many businesses elect to incorporate in Delaware for tax-related reasons.  Sales taxes on health services and products vary from state to state.   It’s going to be interesting to see how internet hearing aid sales are affected if, as expected, the Government passes an internet sales tax law in the near future.  This could be a plus for RR’s brick & mortar dispensing practice.   

 

Subsidies

Government support can take the form of subsidies to consumers or businesses.  Using the phrase “Government subsidy” vis-à-vis  the VA is not really correct. The phrase refers to situations where the Government pays money to companies/sectors/consumers to make them competitive and/or help them out.  Back to the Audiologists-Are-Like-Wheat-Farmers analogy, there are times when the Government pays farmers NOT to grow wheat, with the intent of driving up wheat prices and making it worthwhile for selected farmers to grow it.  I know of no instance in which the Government has paid hearing aid manufacturers or dispensers to STOP making or selling hearing products or services.  Just shows you how we stack up against wheat!  

 I linked the VA and “subsidy” together for purposes of discussion.  Few if any will argue if I say that the Government subsidizes the health care of veterans by providing hospitals/clinics/providers/services to those who qualify.  That’s a consumer subsidy{{1}}[[1]]The usual caveat applies:  we’re talking straight Economics here, not Politics or Ethics.[[1]]  If I note that qualified veterans receive hearing aids at a Price of $0.00, then I can further say that the Government subsidizes hearing aid transactions conducted by the VA by assuming the marginal costs of selling.  That’s a Supplier subsidy of sorts, in the sense that the Government funds the VA’s budget.  Though the Government does not subsidize hearing aid manufacturers, I would hazard a guess that “Made in America” (or at least “Corporate Headquarters in America”) is a useful negotiating point in negotiating to land a VA contract.  Does anyone out there know whether Starkey has always scored a VA contract?  Just wondering….

Back to dispensing.  If the playing field were level and  Government subsidized all dispensing transactions to qualified veterans, then the Supply Curve would keep shifting right until Supply met Demand–all market competitors would

Kink in the Supply Curve

continue to Supply in increasing Quantities until every qualified veteran that wanted hearing aids had gotten them at a Price of $0.00. Meanwhile, they would also sell hearing aids to others in the Market at Prices commensurate with their businesses’ marginal costs.  

But, that’s not the way it works in the US.  Subsidized hearing aids are available only through the VA; other competitors’ marginal costs are not reduced.  The Supply Curve doesn’t shift, it just gets kinked, as shown in Figure 1.{{2}}[[2]]Kinked Demand Curves are common in Economics, but I don’t think kinked Supply Curves are in vogue. I’m simplifying a lot and avoiding the effects of Demand on Supply and vs.  I’ll probably be denied my Economics degree for cutting corners.[[2]]  Nobody’s Willing to Supply at $0.00 except the VA, which will Supply as much as its budget allows.  A regular Supply Curve has a continuous positive slope as Price increases, indicating that competitors are Willing to Sell at different Prices according to their internal costs of doing business. But with the VA in the market, there is a large Quantity “Sold” at Prices below the original Supply Curve:  only the VA is Willing to Sell when Price  $0.00.  The Supply Curve  flat-lines till Price rises sufficiently to bring in other competitors, above which point the Supply Curve resumes its original positive sloping shape.   When curves get kinky, small Price-Takers like RR can literally feel the field tilting — sometimes right out from under them.

Subsidized hearing care is common in some countries (e.g., Australia), where eligibility for hearing services and products covers a host of conditions and citizens.  The tilt of nationalized hearing health care is not sufficient to eliminate private practitioners — at least not in Australia where lots of my ancient book on private practice have been sold for reasons that escape me.  I can’t go further down that road because that’s about all I know about international health care delivery.  However, I invite readers from other countries to chime in and then I’ll punt all that information to our International Section editor, Bob Traynor, and ask him to give us the big picture view.

Enough boring Economics!  Let’s talk next week about something fun like Stealing!  We’ll get back to the Government and Economics later.   



About Holly Hosford-Dunn

Holly Hosford-Dunn, PhD, graduated with a BA and MA in Communication Disorders from New Mexico State, completed a PhD in Hearing Sciences at Stanford, and did post-docs at Max Planck Institute (Germany) and Eaton-Peabody Auditory Physiology Lab (Boston). Post-education, she directed the Stanford University Audiology Clinic; developed multi-office private practices in Arizona; authored/edited numerous text books, chapters, journals, and articles; and taught Marketing, Practice Management, Hearing Science, Auditory Electrophysiology, and Amplification in a variety of academic settings.