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Price and Quality Competition under Adverse Selection: Market Organization and Efficiency

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  • Biglaiser, Gary
  • Ma, Ching-to Albert

Abstract

Firms compete with prices and qualities in markets where consumers have heterogeneous preferences and cost characteristics. Consumers demand two goods, which can be supplied jointly or separately by firms. We consider two strategy regimes for firms: uniform price-quality pairs, and screening price-quality menus. For each regime, we compare the equilibria under integration (each firm supplying both goods) and separation (each firm supplying one good). Integrating and separating markets change quality, efficiency, and welfare. The theory illustrates phenomena such as the carveout of mental health and substance abuse coverage from general health insurance, and creaming for low-cost students in locales with school choices. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Biglaiser, Gary & Ma, Ching-to Albert, 2003. "Price and Quality Competition under Adverse Selection: Market Organization and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 266-286, Summer.
    • Handle: RePEc:rje:randje:v:34:y:2003:i:2:p:266-86
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    Cited by:

    1. Rosella Levaggi & Marcello Montefiori, 2013. "Patient selection in a mixed oligopoly market for health care: the role of the soft budget constraint," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 60(1), pages 49-70, March.
    2. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, April.
    3. Olivella, Pau & Vera-Hernandez, Marcos, 2007. "Competition among differentiated health plans under adverse selection," Journal of Health Economics, Elsevier, vol. 26(2), pages 233-250, March.
    4. Robert E. Martin, 2011. "The College Cost Disease," Books, Edward Elgar Publishing, number 14179.
    5. Shi Bo & Chen Wen, 2018. "Individual Health Insurance Market with an Entrant – The ACA Health Insurance Exchange Observations," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 12(2), pages 1-27, July.
    6. Howell, Bronwyn, 2006. "Unveiling 'Invisible Hands': Two-Sided Platforms in Health Care Markets," Working Paper Series 18936, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    7. Zhijun Chen & Chongwoo Choe & Jiajia Cong & Noriaki Matsushima, 2022. "Data‐driven mergers and personalization," RAND Journal of Economics, RAND Corporation, vol. 53(1), pages 3-31, March.
    8. Howell, Bronwyn, 2006. "Unveiling 'Invisible Hands': Two-Sided Platforms in Health Care Markets," Working Paper Series 3841, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    9. William Jack(Georgetown University), 2004. "Optimal risk adjustment in a model with adverse selection and spatial competition," Working Papers gueconwpa~04-04-15, Georgetown University, Department of Economics.
    10. Nakagawa, Akihiko & Matsushima, Noriaki, 2023. "A note on conglomerate mergers: The Google/Fitbit case," Japan and the World Economy, Elsevier, vol. 67(C).
    11. Zhijun Chen & pch346 & Chongwoo Choe & Jiajia Cong & Noriaki Matsushima, 2020. "Data-Driven Mergers and Personalization," Monash Economics Working Papers 16-20, Monash University, Department of Economics.
    12. Daron Acemoglu & Asuman Ozdaglar, 2011. "Opinion Dynamics and Learning in Social Networks," Dynamic Games and Applications, Springer, vol. 1(1), pages 3-49, March.
    13. de Lange, Deborah & Valliere, Dave, 2020. "Investor preferences between the sharing economy and incumbent firms," Journal of Business Research, Elsevier, vol. 116(C), pages 37-47.
    14. Rosella Levaggi, 2007. "Regulating internal markets for hospital care," Journal of Regulatory Economics, Springer, vol. 32(2), pages 173-193, October.
    15. Jack, William, 2006. "Optimal risk adjustment with adverse selection and spatial competition," Journal of Health Economics, Elsevier, vol. 25(5), pages 908-926, September.
    16. Levaggi, Rosella & Montefiori, Marcello, 2005. "It takes three to tango: Soft budget constraint and cream skimming in the hospital care market," POLIS Working Papers 48, Institute of Public Policy and Public Choice - POLIS.
    17. Pau Olivella & Marcos Vera-Hernandez, 2010. "How complex are the contracts offered by health plans?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(3), pages 305-323, July.
    18. Hart Hodges & Steven Henson, 2009. "Medical Reimbursements and Patient Selection by Physicians: A Capital-Theoretic Approach," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(4), pages 397-408, December.
    19. repec:vuw:vuwscr:18936 is not listed on IDEAS
    20. Evrim Güneş & Stephen Chick & Luk Wassenhove, 2010. "Quality competition for screening and treatment services," Annals of Operations Research, Springer, vol. 178(1), pages 201-222, July.
    21. Normann Lorenz, 2014. "Adverse selection and heterogeneity of demand responsiveness," Research Papers in Economics 2014-02, University of Trier, Department of Economics.
    22. Rosella Levaggi, 2005. "Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information," International Journal of Health Economics and Management, Springer, vol. 5(4), pages 327-349, December.

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