Competition and Consume Choice in Option Demand Markets

Two medical providers choose their geographic location and medical-care specialization, and then compete in prices under health insurance sales. When buying insurance consumers know their geographic address, but they do not know their preferred medical treatment before getting sick. This uncertainty generates option demand for multiple providers: consumers may desire access for both providers although eventually attending only one. I show that this market presents equilibria-multiplicity by characterizing two types of symmetric equilibria. In the first equilibrium providers locate at the two ends of the city and choose to provide the same medical product. Hence each consumer buys access only to the geographically-nearest provider. In the second equilibrium providers locate at the city center and at the quartiles of the products line. Under these locations and products choices all consumers buy access to both providers. The efficient market outcome depends on the relative size of the mismatch and commuting costs parameters. The market may provide efficient, excessive, or insufficient level of consumer choice in terms of product differentiation and geographic dispersion. However, regulating providers' geographic locations properly can always support first best market outcome.