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Competition and Product Choice in Option Demand Markets

Listed author(s):
  • Gilad Sorek

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).

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File URL: http://cla.auburn.edu/econwp/Archives/2015/2015-11.pdf
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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2015-11.

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Date of creation: Aug 2015
Handle: RePEc:abn:wpaper:auwp2015-11
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  4. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, Elsevier.
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  7. Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2012. "The regulation of health care providers’ payments when horizontal and vertical differentiation matter," Journal of Health Economics, Elsevier, vol. 31(5), pages 691-704.
  8. 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.
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  10. Ching-To Albert Ma, 1997. "Option Contracts and Vertical Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 725-753, December.
  11. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
  12. Rudy Douven & Rein Halbersma & Katalin Katona & Victoria Shestalova, 2014. "Vertical Integration and Exclusive Behavior of Insurers and Hospitals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(2), pages 344-368, 06.
  13. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
  14. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
  15. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227.
  16. Kurt R. Brekke & Robert Nuscheler & Odd Rune Straume, 2006. "Quality and Location Choices under Price Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 207-227, 03.
  17. Esther Gal-Or, 1997. "Exclusionary Equilibria in Health-Care Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 5-43, 03.
  18. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
  19. Katz Michael L, 2011. "Insurance, Consumer Choice, and the Equilibrium Price and Quality of Hospital Care," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-44, January.
  20. Gravelle, Hugh & Sivey, Peter, 2010. "Imperfect information in a quality-competitive hospital market," Journal of Health Economics, Elsevier, vol. 29(4), pages 524-535, July.
  21. Gilad Sorek, 2015. "Location and Product Choice in Option Demand Markets," Auburn Economics Working Paper Series auwp2015-07, Department of Economics, Auburn University.
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