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Product Proliferation under Rational Inattention: Application to Health Insurance

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  • Zach Y. Brown
  • Jihye Jeon

Abstract

In markets with complicated products such as insurance, why do firms offer many products even when consumers appear to receive little benefit? We show that when consumers face information acquisition costs, firms may have an incentive to introduce many undifferentiated products. This allows firms to gain market share and increase markups. We document initial evidence consistent with the model using data from Medicare prescription drug insurance. Insurers that offer more duplicate or similar plans have higher-cost plans. These results suggest a role for policymakers to restrict product proliferation in markets with complicated products.

Suggested Citation

  • Zach Y. Brown & Jihye Jeon, 2021. "Product Proliferation under Rational Inattention: Application to Health Insurance," AEA Papers and Proceedings, American Economic Association, vol. 111, pages 554-559, May.
    • Handle: RePEc:aea:apandp:v:111:y:2021:p:554-59
    DOI: 10.1257/pandp.20211082
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    More about this item

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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