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Price Variation in Markets with Homogeneous Goods: The Case of Medigap

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  • Nicole Maestas
  • Mathis Schroeder
  • Dana Goldman

Abstract

Nearly 30 percent of Americans age 65 and older supplement their Medicare health insurance through the Medigap private insurance market. We show that prices for Medigap policies vary widely, despite the fact that all plans are standardized, and even after controlling for firm heterogeneity. Economic theory suggests that heterogeneous consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), we estimate average search costs to be $72. We argue that information problems arise from the complexity of the insurance product and lead individuals to rely on insurance agents who do not necessarily guide them to the lowest prices.

Suggested Citation

  • Nicole Maestas & Mathis Schroeder & Dana Goldman, 2009. "Price Variation in Markets with Homogeneous Goods: The Case of Medigap," NBER Working Papers 14679, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14679
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    References listed on IDEAS

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    1. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
    2. David Card & Carlos Dobkin & Nicole Maestas, 2004. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health Evidence from Medicare," Working Papers WR-197, RAND Corporation.
    3. Dana Goldman & Nicole Maestas, 2013. "Medical Expenditure Risk And Household Portfolio Choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(4), pages 527-550, June.
    4. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
    5. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    6. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-438, April.
    7. David Card & Carlos Dobkin & Nicole Maestas, 2008. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization: Evidence from Medicare," American Economic Review, American Economic Association, vol. 98(5), pages 2242-2258, December.
    8. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
    9. David Card & Carlos Dobkin & Nicole Maestas, 2004. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare," NBER Working Papers 10365, National Bureau of Economic Research, Inc.
    10. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, vol. 88(12), pages 2515-2547, December.
    11. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
    12. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    13. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    14. Ali Hortaçsu & Chad Syverson, 2004. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 403-456.
    15. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
    16. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
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    Cited by:

    1. Wuppermann, Amelie C. & Bauhoff, Sebastian & Grabka, Markus M., 2014. "The Price Sensitivity of Health Plan Choice: Evidence from Retirees in the German Social Health Insurance," Discussion Papers in Economics 21080, University of Munich, Department of Economics.
    2. Bolhaar, Jonneke & Lindeboom, Maarten & van der Klaauw, Bas, 2010. "Insurance Search and Switching Behavior," CEPR Discussion Papers 7942, C.E.P.R. Discussion Papers.
    3. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, Elsevier.
    4. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    5. Keith M. Marzilli Ericson & Amanda Starc, 2015. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 667-682, July.
    6. repec:eee:hapoch:v1_661 is not listed on IDEAS
    7. Amanda Starc, 2014. "Insurer pricing and consumer welfare: evidence from Medigap," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 198-220, March.
    8. Wuppermann, Amelie & Bauhoff, Sebastian & Grabka, Markus, 2014. "The Price Sensitivity of Health Plan Choice among Retirees: Evidence from the German Social Health Insurance," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100352, Verein für Socialpolitik / German Economic Association.

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    JEL classification:

    • I2 - Health, Education, and Welfare - - Education

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