Supplierinduced Demand

The effect that doctors (or some other group of professionals), as providers of services, may have in creating more patient demand than there would be if they acted as perfect agents for their patients. There appears to be some adjustment of physician behaviour in order to maintain incomes. For example, as female fertility has fallen, obstetricians in the USA appear to have increased the rate of caesarian section deliveries relative to vaginal. The former carry a higher fee and the switch enables a partial compensation for the diminishing business available to obstetricians. Supplier-induced demand (SID) has commonly been alleged to arise when there is an increase in the number of doctors; however the fact that the supply of services increases as doctors increase may be the ordinary result of an increase in supply (demand constant) rather than the result of a shift in both supply and demand. Testing for the presence and extent of SID has been bedevilled by this identification problem. Fee-for-service is often held to encourage unnecessary supplier-induced demand, though the evidence for this is hotly contested. The debate is clouded by a number of other mysteries: how 'unnecessary' is any demand that might be induced? Might not inducement be a good thing in the presence of certain kinds of externality? See Agency Relationship, Asymmetry of Information, Small Area Variations, Target Income Hypothesis.

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