Duopoly Competition and Regulation in a Two-Sided Health Care Insurance Market with Product Differentiation
We compare duopoly competition with a regulated public monopoly in the health care insurance sector using the two-sided market approach. Health plans allow policyholders and physicians to interact. Policyholders have a preference for one of two health plans and value the diversity of physicians. Physicians value the number of policyholders because they are paid on a fee-for-service basis. This is a positive network externality. We find that the resulting Nash equilibria are explained by the two standard effects of product differentiation: the price competition effect and the market share effect, and by two opposing effects related to the network externality. We call these the positive earning effect and the negative spending effect. Overall the comparison between the two types of organizations shows that regulation is preferred when the physicians' market is not covered and competition is preferred when it is covered. But each time the choice is made at the expense of one type of agent.
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