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Regulating from the Demand Side: Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales

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  • Gilad Sorek
  • Randolph T. Beard

Abstract

We study the implications of extending public-insurance coverage to an existing medical market in Salop’s spatial model of imperfect competition. In this setup a public insurer sets a price to medical providers, which must maintain their reservation pro.t from selling on the spot market directly to consumers. We show that the public insurer can manipulate this reservation profit by setting the coinsurance rate, and that setting the coinsurance rate properly yields the market first best product diversification. The results survive generalizations including moral hazard and incomplete coverage. When adding quality choice to the analysis, a minimum quality standard that is combined with a proper coinsurance rate can still support market efficiency.

Suggested Citation

  • Gilad Sorek & Randolph T. Beard, 2016. "Regulating from the Demand Side: Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales," Auburn Economics Working Paper Series auwp2016-06, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2016-06
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    References listed on IDEAS

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    Keywords

    Public-Insurance; Spatial Monopolistic Competition; Market Efficiency; Regulation;
    All these keywords.

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