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

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  • Nicole Maestas
  • Mathis Schroeder
  • Dana Goldman
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    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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    Bibliographic Info

    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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    1. 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, University of Chicago Press, vol. 110(3), pages 481-507, June.
    2. David Card & Carlos Dobkin & Nicole Maestas, 2008. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization: Evidence from Medicare," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2242-58, December.
    3. 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, University of Chicago Press, vol. 116(2), pages 303-350, 04.
    4. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, Elsevier, vol. 88(12), pages 2515-2547, December.
    5. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
    6. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
    7. Dana Goldman & Nicole Maestas, 2005. "Medical Expenditure Risk and Household Portfolio Choice," NBER Working Papers 11818, National Bureau of Economic Research, Inc.
    8. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(2), pages 418-38, April.
    9. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 480-93, June.
    10. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
    11. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
    12. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(4), pages 833-862, August.
    13. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
    14. Ali HortaƧ Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(2), pages 403-456, May.
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    Cited by:
    1. repec:dgr:uvatin:2010072 is not listed on IDEAS
    2. Wuppermann, Amelie C. & Bauhoff, Sebastian & Grabka, Markus M., 2014. "The Price Sensitivity of Health Plan Choice: Evidence from Retirees in the German Social Health Insurance," Discussion Papers in Economics, University of Munich, Department of Economics 21080, University of Munich, Department of Economics.
    3. Jonneke Bolhaar & Bas van der Klaauw & Maarten Lindeboom, 2010. "Insurance Search and Switching Behavior," Tinbergen Institute Discussion Papers 10-072/3, Tinbergen Institute.
    4. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
    5. Keith M. Marzilli Ericson & Amanda Starc, 2012. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," NBER Working Papers 18089, National Bureau of Economic Research, Inc.

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