Because consumers are poorly informed, each physician is less restrained by his competitors than he would otherwise be. His competitors may supply similar services, but poor information causes consumers to view these services as if they were very different. As a result, physicians can function more like isolated monopolists, raising prices considerably above the competitive level without losing all or perhaps even most of their customers. This situation is called monopolistic competition . For hospitals, the situation is similar, although the information problem is not so acute.
Physicians help their patients to select a hospital.
But incentives for a price search and the selection of low-priced providers are weaker for hospitals because hospital insurance is more complete than physician insurance. Consumer information will always be costly and imperfect in this market because of the nature of the services. The problem is exacerbated by health insurance, by the medical profession, and by counterproductive regulation. Poor consumer information may seem an insurmountable barrier to competition. Yet the market has developed institutions to provide information, particularly through large group practices, PPOs, and HMOs.