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

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  • Nicole Maestas
  • Mathis Schroeder
  • Dana P. Goldman
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    Abstract

    About one-third of elderly Americans age 65 and older supplements their Medicare health insurance in a private insurance market known as the ÒMedigapÓ market. Prices for Medigap policies vary widely, despite the fact that regulations enacted in 1992 standardized all Medigap policies, thereby creating a market with homogenous insurance products. Economic theory suggests that 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), the authors find that nearly all consumers face search costs high enough to prevent them from searching until they find the lowest priced Medigap policy. They estimate average search costs to be $249, substantially higher than has been found in other markets, but plausible given the complex nature of the Medigap market and its elderly consumer population. The implied aggregate welfare loss is approximately $798 million or $484 per policyholder.

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    File URL: http://www.rand.org/content/dam/rand/pubs/working_papers/2007/RAND_WR504.pdf
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    Bibliographic Info

    Paper provided by RAND Corporation Publications Department in its series Working Papers with number 504.

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    Length: 52 pages
    Date of creation: Jul 2006
    Date of revision:
    Handle: RePEc:ran:wpaper:504

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    Keywords: health insurance; medigap; elderly;

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    1. David Card & Carlos Dobkin & Nicole Maestas, 2004. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare," NBER Working Papers 10365, National Bureau of Economic Research, Inc.
    2. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
    3. 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.
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