Sunday, March 1, 2009

Economics of Donations

This morning, my 12 year old noticed that on the calendar in the kitchen, I simply had “blood” written for yesterday morning. I was surprised that he had to ask about it since he and my four year old both knew that I had gone to the American Red Cross blood donor center nearby yesterday to donate blood. I do this every eight weeks (the maximum allowed) as long as I avoid certain international travel (which sometimes results in deferral) and as long as I am feeling well (as the American Red Cross will defer donors who may be ill).

This is a good example of a “market” that is completely voluntary that works fairly well but that seems like it is often at the edge of failure.

How can we think about the market for blood and blood donors? First, it is important to remember that the ultimate demand is for the blood products. There are many health care organizations and individual patients who demand blood products—although the patients can only express this demand through a provider. Donors are told that their whole blood donation of one pint can help up to three recipients. If there were a way to produce blood products without the donors, then there would not be a market for donors. As a result, the demand for blood donors is primarily a “derived demand”. This is a term economists use to describe something for which there is not an inherent value of the individual or good or service itself but there is a value for what that person or thing or service provides. So, the market for blood products creates a market for blood donors. The demand side of the market for whole blood donors (at least in central Maryland) is dominated by the American Red Cross. In some places there are other organizations that collect plasma, but, locally, whole blood is nearly the exclusive domain of the American Red Cross. The American Red Cross is an important intermediary between the suppliers of the blood and the demanders of the blood products. The potential suppliers are many—and no one dominates on the supply side.

With a lot of demanders and a lot of suppliers, it seems like the market could be reasonably efficient. One difference between this market and other markets is the lack of clarity for what the supplier gets in return for participating in the market. I’ll discuss that in my next entry. For the time being, suffice it to say that the market for blood products and what it takes to get blood products to patients is an interesting one to illustrate the concept of derived demand, to illustrate what can motivate suppliers other than money, and to eventually illustrate some cost effectiveness considerations.

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