Question

With ventilators in short supply and U.S. COVID-19 cases surging in mid-March, the coronavirus pandemic gave rise to a cross-industry partnership pairing automaker General Motors with Seattle area medical device company Ventec Life Systems.

Ventec, a small medtech founded in 2012, was operating at full capacity in March, producing a few hundred units per month to meet the urgent need for ventilators. But it lacked the resources and infrastructure to increase production on a massive scale. That's when General Motors ("GM") stepped forward offering to help Ventec build the lifesaving breathing devices at the automaker's plant in Kokomo, Indiana. Within a month, the first ventilators jointly produced by GM and Ventec were delivered to hospitals in the Chicago area.  The entry of a significant new producer (in this case, the joint venture between Ventec and GM) into the ventilator market increased the supply of ventilators, and helped the country at a critical time.

1. We would normally expect market prices to decline when a significant new competitor enters the market. However, ventilator prices during this period actually increased.  Explain why ventilator prices increased.  
2. Assume ventilators and automobiles are "substitutes in production" for GM. Predict what should happen to the price of a GM automobile during this timeframe.  

Answer 1

We expect the entry of a new producer to reduce the prices for a good because the supply curve shifts the right which means that at the new equilibrium level, prices fall. However, in this case we see that prices have risen since the partnership between the two companies has created a temporary monopoly. The demand for ventilators seems to be very inelastic since people will pay whatever money is required in order to save lives. This means that with a rise in price, the demand for ventilators barely falls. Hence the producers can have a control over the price and charge what they feel like.

Since ventilators and automobiles are substitutes in production, the supply of automobiles reduces and hence the supply curve shifts to the left. This causes prices of a GM automobile rises.