The market for physiotherapists is competitive. Chiropractic services and physio

Question

The market for physiotherapists is competitive. Chiropractic services and physiotherapy services are substitutes. Currently the price per visit is $40 and the quantity utilized is 30,000 visits annually. Physiotherapists face stiff competition from chiropractors. Currently, chiropractors charge $35 per visit and there are 15,000 visits annually in the region. The chiropractic association has decided to license another 20 practitioners in the region. This will lower the price to $25 per visit. There is no change in the supply of physiotherapists. What will be the direction of the effect of the change in chiropractors on the price and quantity utilized for physiotherapy services?

Explanation / Answer

If chiropractic(C) and physiotherapy(P) services are substitutes then, fall in price of C will raise its quantity demanded and demand of P will fall as relative price of P rises initially. Now, if P does not change in supply then, there is excess supply at on going prices. Hence, to sell out totally, i.e with 0 inventory, P has to lower its price.

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