As the holiday season kicks into full gear, I am always ready for a trip to Best Buy. What a great store! I could spend hours among the choices of sound systems, radios, telephones, electronic games, MP3 players, household appliances, cameras, video recorders, computers and computer peripherals.
Computers are my favorite. When I finished my dermatology training and joined the faculty of the Wake Forest University School of Medicine, I splurged and bought a state-of-the-art Gateway 486DX, 66MHz machine with 16MB of RAM. The cost at the time? $5,000.
By today’s standards, my beloved Gateway would be a dinosaur. A modern computer might have a 3.2GHz processor (over 50 times faster than the one in the old Gateway) and would have 250 times as much RAM. The modern computer would be smaller, lighter, have a bigger screen and would cost 1/10 what I paid for my old Gateway.
Over the past 15 years, the quality of computers has improved dramatically, and the cost has continued to decline. Why? There is tremendous competition driving more innovation and exerting pressure on prices. My nearest Best Buy competes with nearby Circuit City, Costco, Walmart, Sams, Target, Office Max and Office Depot — not to mention the Internet. Consumers shop prices when they are shopping for a computer. If Best Buy was the only game in town, it could certainly charge more.
But consumers are not only looking for the least expensive option — they are also looking for quality — faster computers, more gigabytes of memory, more megapixels of camera resolution, more features, etc. — as well as reliability. Consumers may choose to pay more for a brand name, basing that decision on the company’s strong reputation for good quality and good service. The consumer may choose not to go to a big box store to buy the computer; instead, he or she may go to a specialty store where the personnel has more experience and training, and provides more personal service.
Consumer experiences, such as purchasing a new computer, are basic to our everyday life in the capitalist world. The market can be an amazing system in which simple economic principles function. The direct interaction between buyers and sellers provides a system in which there are incentives to improve quality and to lower cost. Most buyers are careful to purchase products and services that they value and don’t waste money on things that provide little benefit to them.
This economic system makes food in the United States inexpensive and plentiful; provides an extraordinary array of housing and clothing choices; and underlies the availability of an incredible array of affordable goods, services and entertainment options.
However, this economic system does not underlie the economics of health care in the United States. There is very little direct purchase of health care services from physicians and hospitals — there is a third party, the insurer, involved.
Therefore, the motivation to improve quality and lower cost will never be as great as it is in the world of products at Best Buy, at least under our current system of insurance paying for health care.