Dark Knights of Monopoly

“None shall pass.”    …   “I’ve had worse.”  Monty Python’s Black Knight

The Black Knight’s utterances joust with each other, which makes for a very funny video.

His stance–and lack thereof–conjure up images in my mind of the hearing aid industry and Audiologists.  Our Big 6 set formidable entry barriers, determined that none shall pass.  Independent Audiologists give up their right arms and other appendages–as long as they have a leg to stand on–to pay rising invoice prices, rationalizing that it could be worse.  

Is the hearing aid industry practicing the dark arts of Monopoly or is it a fast-moving technological sector that is employing Monopolistic Pricing methods to maintain and expand industry growth.  Or both?  Are Audiologists brave, stupid, or both? The Health Economist’s answer  is “It depends, but at least it’s not hip replacements.”

 Hips vs Ears — None Shall Pass, But It Could Be Worse

The hearing aid industry looks good in comparison to the hip replacement industry, where Monopolists’ practices are being publicly scrutinized in a remarkably in-depth NYTimes investigation.  Headers below are excerpts from the  investigation.  Sub-headers  substitute hearing for hips to highlight industry parallels and comparisons.  

Makers of artificial implants … have proved particularly adept at commanding inflated prices, according to health economists. Multiple intermediaries then mark up the charges. 

• REWORD:  Makers of hearing aids have proved adept at commanding high prices. Audiologists/dispensers then mark up the charges to cover fitting, programming and follow-up.
• COMMENT:  Hearing aid manufacturers aren’t as adept as hip manufacturers at inflating prices, probably because one can live a lot longer with untreated hearing loss than with a bad hip.  There are few  “multiple intermediaries” (e.g., hospitals) wetting their beaks and jacking up the price{{1}}[[1]]hi Healthinnovations is an attempted intermediary model which, if successful, would ultimately lead to Price Taker behaviors.[[1]]In short:  it could be worse.

 

An artificial hip … costs only about $350 to manufacture.

• REWORD:  A hearing aid costs about $100 to manufacture.
• COMMENT:  Just. Shoot. Me. Now.  I am so tired of hearing this naive, erroneous, but persistent argument.  Refer to Harvey Abrams’ post on cost of production to get this out of your system and give up your $100 fixation.

 

Nearly all hip and knee implants — sterilized pieces of tooled metal, plastic or ceramics — are made by 5 companies, which some economists describe as a cartel.

• REWORD:  Nearly all hearing aids — plastic forms housing microphones, batteries, processors and receivers — are made by five or six companies, which some audiologists describe as a cartel.  
• COMMENT:  I have not heard of any economists describing the US hearing aid industry as a cartel, but I’ve heard a lot of consumers and Audiologists  do so.

 

Manufacturers tweak old models and patent the changes as new products, with ever-bigger price tags.

• REWORD:  No change needed.
• COMMENT:  Not in our case, at least not since the late 1990’s.  Refer to figure 1, below, from a previous post, which concluded:  “the logarithmic trend of cumulative price increases (red box function), based on a premium pricing surge function (blue diamonds), …peaked with … CIC and first-generation digital technology and has been declining ever since.  Premiums are decreasing as technology is increasing….”  

   

Companies defend this turf ferociously.

• REWORD:  No change needed.
• COMMENT:  Well, yeah, that’s their job.  They’re Price Takers.

 

Though the 5 companies make similar models, each cultivates intense brand loyalty through financial ties to surgeons and the use of a different tool kit and operating system for the installation of its products; orthopedists typically stay with the system they learned on.

• REWORD:  Though the Big 6 make similar hearing aids, each cultivates intense brand loyalty through financial ties to Audiologists/dispensers and the use of different programming software for fitting the instruments; Audiologists and dispensers typically stay with the system they learned on.
• COMMENT:  Intense technological competition means instruments must improve if a company is to remain in the game. Each cultivates intense brand loyalty through loyalty programs and other financial ties to Audiologists/dispensers as well as the use of proprietary, patented systems for fitting and follow-up.    Clinicians stick with hearing aids and software with which they have experience and training.  

 

The American health care market is plagued by … ‘sticky pricing’  in which prices of products remain high or even increase over time instead of dropping. 

Fig 1. Estimated Price Premiums for Hearing Aid Technological Advances

• REWORD:  See Figure 1.  
• COMMENT:  True, premium product wholesale pricing continues to rise, but it is offset by increasing price spread through product differentiation.  Low-end hearing aids cost less, in real dollars, than they did in 1998.  I don’t have a comparison of list prices, since I don’t believe anyone actually charges list,{{2}}[[2]]If anyone out there is paying list price for their hearing aids from the manufacturers, or is charging list price to retail customers, please let me know.  If the former, I will want to know what’s wrong with you.  If the latter, I will want to find out how you’re doing it.[[2]]

They price this way because they can.

• Reword:  Hearing aid manufacturers price this way because they can.
• Comment:   Extreme pain, limited mobility and health insurance coverage make it  hard to forego a hip if you really need one, regardless of price.  Not so much with hearing aids, which aren’t usually covered by insurance, can stigmatize, and don’t alleviate pain or restore mobility.  And yet, our Big 6 price “because they can,” just like the hip replacement manufacturers,  just not as well.  

Just a Flesh Wound or Did We Just Lose a Hip?

The economic explanation of why hip replacement manufacturers are bigger Monopolist Pricers than our Big 6 has to do with what economists call Price Sensitivity and Elasticity of Demand. On the other hand, our Big 6 can play catch up by using Price Discrimination for different markets.   Those are topics for next week and beyond, but here’s a sneak preview:  

•  Consumers are Price Sensitive — the lower the price, the more inclined they are to purchase.  If the price is too high, they’ll skip the purchase and figure out a substitute.  Economists say that consumers’ Demand for hearing aids is elastic because it changes a lot with price.{{3}}[[3]]I’m referring to the entire consumer market with hearing loss, not just the 20% who purchase hearing aids.  Those  folks are known to constitute a fairly inelastic market.[[3]]
• Audiologists are Price Insensitive in the sense that they can’t not buy.   Audiologist do it because they have to.  Economists say that Audiologists’ Demand for hearing aids is inelastic because it doesn’t change much as price changes.
•  Hearing aid manufacturers do it because they can. Faced with two Demand curves of different elasticities (consumers and Audiologists), any Price-Making-Hearing- Aid-Manufacturer worth its salt will sell high to the inelastic Audiology market and sell low(er) to the elastic consumer market.  

And that’s what’s happening.