June 21, 2023
One of my longest-running interests is the provision of quality by markets. My junior year of college, I wrote my Health Economics paper for Tracy Miller on overcoming asymmetric information in markets for health services.
Yet, Peter Leeson recently observes:
“Scholars outside economics routinely rebuke that market as a sea of phony products peddled by duplicitous hucksters to naïve consumers via false advertising (see, for instance, Cody 1999; Aronson 2009; Crawford 2012). And economists seem to agree: “Prior to the regulation of pharmaceuticals,” one popular health economics textbook observes, “there were many accounts of salespeople marketing cures for all types of ailments to an unsuspecting public” (Sloan and Hsieh 2012: 286). According to another economist, “In the premodern era, false advertising was common,” to wit, “touting the miraculous advantages of patent medicine” (Glaeser 2006: 137). Popular opinion echoes this trope, which is so ingrained that figurative speech uses the term patent medicine to connote that which is bogus or fraudulent (see, for instance, Krugman 1994).”
So, there you have it. Non-economist scholars, economists, and the public all think that markets are awash in low-quality products hawked by charlatans. Leeson shows that, in the case of medicine, such was not the case.
In my undergrad paper, I argued that “hostage-taking” and brands could work to secure quality in the market for medical services. Even at the time, though, I recall wondering why such arrangements weren’t more widespread.
I was thus delighted to discover a possible answer in an older, thought-provoking paper by Shirley Svorny. In speaking about why brand names aren’t more prevalent to assure the quality of individual physicians, she writes:
“It is likely that we have not seen the use of hospital brand name to assure quality because in the past most hospitals (almost all large hospitals) have been nonproprietary. The ability of brand name investments to assure quality is attenuated in a nonproprietary setting for lack of a residual claimant. But the prevalence of nonproprietary hospitals has not been a market result. It is thought to be the result of government policies (tax advantages, construction grants) that favor nonproprietary hospitals…This has kept the physician the residual claimant in the provision of physician services.”
As is so often the case when something strikes you as “funny” about markets, some long-forgotten-but-still-binding government restriction is the explanation.
On another note, I recently learned with sadness that Shirley passed away late last year. I was not as optimistic as she about the benefits of licensing, but in my one correspondence with her, I found her to be an encouraging, joyful, insightful, and kind scholar. Read one of her papers today.