Rent seeking in cadaveric organ

Rent seeking in cadaveric organ markets

Last night I based a post about price controls in markets for cadaveric human organs for transplants on a recent journal article - Beard, Kaserman, and Saba. "Limits to Altruism: Organ Supply and Educational Expenditures." Contemporary Economic Policy. 22(4):433-441. October 2004: "Deadly price controls".

Beard et al. described the ways that transplantable human organs were obtained from people who have just died. They pointed out that under federal statutes families could not be paid for organ donations.

This is a price control, suppressing explicit price competition for cadaveric organs. But, the organs are a valuable resource, and when explicit price competition is precluded, people will compete for the value in other ways. Beard et al. point out that:

"Because the price of a valuable resource is held at zero under this system, rents are created. Those rents, in turn, are likely to be captured by downstream suppliers (e.g., physicians, transplant centers, and UNOS)." (434)

UNOS is the organization that distributes organs to transplant centers.

Today I came across an interesting discussion of one of the forms this competition takes. This is provided in an article by Andy Barnett, Roger Blair, and David Kaserman. A fuller citation follows:

"...the public policy that outlaws sales of cadaveric organs encourages hospitals to start their own transplant programs, because that is the only way they can capture the economc rents (or true market value) contained in the organs they collect for free. The artificial shortage created by the zero-price policy pushes the value of the relatively few organs that are collected far above the market-clearing level. This rise in value is especially large given the highly price-inelastic demand for organs. Such value is referred to as economic rent. Because the agent (currently the hospital) that collects these organs cannot legally sell them to a transplant center or to a patient, it can only capture the economic rent by also performing the transplant operation. That is, the economic rents that go uncollected by the altruistic donor do not disappear but are, instead, captured by the transplant surgeon and the hospital at a subsequent stage of production - the transplant operation.

As a result of this economic incentive, we have witnessed a surge in the number of transplant centers in the United States over the past decade, even as the number of transplants performed annually has remained virtually constant. Many of these new centers perform fewer than five transplants per year. In economic terms, the transplant industry is experiencing substantial entry by inefficiently small firms. Entry occurs when profits rise above normal levels in an industry. Normally, such entry then drives the market price back down to the competitive level by increasing supply, therefore eliminating excess profits.

In the transplant industry, however, entry does not increase supply; it merely redistributes the available organs among a larger number of transplant centers. Consequently, entry reduces profitability by pushing costs up rather than pushing prices down. The result is a highly inefficient industry struture with more than the cost-minimizing number of transplant centers."

Page 93 in Barnett, Andy H., Roger D. Blair, and David L. Kaserman. "A Market for Organs." In Entrepreneurial Economics edited by Alexander Tabarrok. Oxford Univesity Press. 2002.

Comments

[Tom Swanson]

Healthy male of Swedish heritage and family history of long lives will donate kidney for fair compensation.