At low demands (D1), general surgeons may be able to cover their average costs, but thoracic surgeons may not. At high demands (D2), thoracic surgeons may be able to offer lower effective prices than can general surgeons (where the effective price to the consumer includes the costs associated with ineffective surgery).

Quantity of surgeries

When demand increases to D2, the market can support a thoracic surgeon. A thoracic surgeon who charges a price above P3 can cover average costs. Moreover, at prices between P2 and P3, the thoracic surgeon can make a profit, but the general surgeon cannot. Thus, at this high level of demand, the thoracic surgeon can drive the general surgeon from the market for thoracic surgery.

The same logic should apply to other specialized surgical and medical services. Thus, in

large markets, we may expect to see a range of specialists and few or no generalists. Researchers at the RAND Corporation documented this pattern of the division of labor in medical markets.3 They found that general practitioners are disproportionately located in smaller towns— they do not appear to fare well in larger markets, which have a wider assortment of specialists. James Baumgardner also found that physicians who practice in small towns treat a wider range of illnesses than do their big-city counterparts.4