Charity, Competition, and the Pricing of Doctors' Services

There are two basic explanations of price discrimination in medicine. The traditional explanation is that the American Medical Association enforces sufficient price discipline to apply the theory of a price-discriminating monopolist. Members of the AMA explain price discrimination by the operation of a charity. This paper develops a charity-competition model in which price discrimination emerges as a consequence of utility maximization by the individual doctor and the necessity of market equilibrium. It is shown that the charity model is more consistent with available empirical evidence than is the monopoly model.