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Competition and Product Choice in Option Demand Markets

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  • Gilad Sorek

Abstract

This paper provides first analysis of horizontal product differentiation in health care markets with option demand. I show that differentiation choices in option demand market differ from those obtained in spot markets analyzes. This is because option demand induces competition over inclusion under insurance coverage, whereas in spot markets providers are competing over the marginal consumers. In addition providers that are perceived as substitutes in the spot market - after exact medical needs reveal, may be perceived as complements in option market - before actual medical needs emerged. I show that in the model option demand market competition in simultaneous moves yields efficient horizontal differentiation and excessive investment in quality. Moreover I show that sequential moves result in asymmetric equilibrium with first mover-gains to the leading provider, too little horizontal differentiation and yet higher expected utility for consumers (compared with simultaneous moves).

Suggested Citation

  • Gilad Sorek, 2015. "Competition and Product Choice in Option Demand Markets," Auburn Economics Working Paper Series auwp2015-11, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2015-11
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    References listed on IDEAS

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    1. Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. " Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-763, Winter.
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    Cited by:

    1. Sorek, Gilad, 2016. "Competition and consumer choice in option demand markets," Economics Letters, Elsevier, vol. 146(C), pages 13-16.
    2. Sorek Gilad, 2016. "Competition and Product Choice in Option Demand Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 785-805, April.

    More about this item

    Keywords

    Health Insurance; Option Demand; Product Differentiation;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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