Price transparency is a topic that economists tend to like to talk about, especially in markets where everything is expensive and confusing.
Generally, price transparency is the ability of participants in a market to know the cost of a good or service being sold. For example, we can say that the price transparency for many consumer goods — from smartphones to snacks — is pretty good, given the fact you can look up the price online or see the price tag in a store.
But then price transparency in a lot of healthcare is a different story. For many procedures, diagnoses, and drugs, you don’t have any idea of what the price will be at different providers until you get the bill.
TLDR, price transparency is how well consumers can figure out what the cost will be without having to be told one-on-one with the person or business selling.
So why does this actually matter?
In the traditional sense of a “free market”, buyers can shop between sellers freely and choose the seller who offers the best deal. Typically, sellers come to the same price through the market so that no other seller has an advantage.
In fact, this model of the free market is also supposed to give sellers zero profit. If a firm makes a profit, that incentivizes new firms to enter
the market, which increases supply and reduces the overall market price to a point that profit is 0.
Of course, this model of the free market doesn’t translate well to the real world, and it’s why we get many inefficiencies like massive markups, the domination of a few companies, and poor accessibility for some groups of buyers.
Importantly for our discussion right now, the lack of price transparency means buyers can’t easily compare prices and choose the seller with the lowest price.
The idea is that better price transparency would force sellers to compete with each other and lower costs throughout the market.