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Measuring the Welfare Effect of Entry in Differentiated Product Markets: The Case of Medicare HMOs

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  • Shiko Maruyama

    ()
    (School of Economics, The University of New South Wales)

Abstract

Should governments subsidize entry to promote competition? In general, theory models cannot determine whether entry under the free-entry condition is socially excessive, optimal, or insufficient. In this paper I propose an empirical framework to evaluate welfare consequences of policy intervention through entry in differentiated product markets, with a case study of the US Medicare HMO market. In endogenizing firms' entry-exit decision, a technical breakthrough is to explicitly incorporate firm heterogeneity by employing a sequential move game. This enables us to exploit detailed firm level data and makes policy simulations relevant. I find no evidence of socially excessive entry. The government may achieve higher social welfare by expanding the program.

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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-01.

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Length: 47 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-01

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  1. Paul Contoyannis & Andrew M. Jones & Roberto Leon-Gonzalez, 2002. "Using Simulation-based Inference with Panel Data in Health Economics," Department of Economics Working Papers 2002-13, McMaster University.
  2. Town, Robert & Liu, Su, 2003. " The Welfare Impact of Medicare HMOs," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 719-36, Winter.
  3. Ciliberto, Federico & Tamer, Elie, 2009. "Market structure and multiple equilibria in airline markets," MPRA Paper 38635, University Library of Munich, Germany.
  4. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  5. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 833-882.
  6. Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
  7. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  8. Leemore Dafny & David Dranove, 2008. "Do report cards tell consumers anything they don't already know? The case of Medicare HMOs," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 790-821.
  9. Patrick Bajari & Han Hong & Stephen Ryan, 2004. "Identification and Estimation of Discrete Games of Complete Information," NBER Technical Working Papers 0301, National Bureau of Economic Research, Inc.
  10. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  11. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
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Cited by:
  1. Shiko Maruyama, 2009. "Estimating Sequential-move Games by a Recursive Conditioning Simulator," Discussion Papers 2009-01, School of Economics, The University of New South Wales.

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