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Price Variation in Markets with Homogeneous Goods: The Case of Medigap

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Author Info
Nicole Maestas
Mathis Schroeder
Dana Goldman
Abstract

Nearly 30 percent of Americans age 65 and older supplement their Medicare health insurance through the Medigap private insurance market. We show that prices for Medigap policies vary widely, despite the fact that all plans are standardized, and even after controlling for firm heterogeneity. Economic theory suggests that heterogeneous consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), we estimate average search costs to be $72. We argue that information problems arise from the complexity of the insurance product and lead individuals to rely on insurance agents who do not necessarily guide them to the lowest prices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14679.

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Date of creation: Jan 2009
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Handle: RePEc:nbr:nberwo:14679

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I2 - Health, Education, and Welfare - - Education

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  1. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier. [Downloadable!] (restricted)
  2. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, vol. 88(12), pages 2515-2547, December. [Downloadable!] (restricted)
  3. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April. [Downloadable!] (restricted)
  5. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-93, June. [Downloadable!] (restricted)
  6. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04. [Downloadable!] (restricted)
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  7. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June. [Downloadable!] (restricted)
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  8. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  9. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213. [Downloadable!] (restricted)
  10. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August. [Downloadable!] (restricted)
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