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Health Insurance on the Internet and the Economics of Search

Author

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  • Mark V. Pauly
  • Bradley Herring
  • David Song

Abstract

This paper explores the level and dispersion of premiums paid for individual health insurance by comparing asking price' data posted on an electronic insurance exchange with survey data on premiums actually paid in the period just before the advent of electronic exchanges. The primary theoretical question is whether the pattern of differences between asking prices and transactions prices can be explained using a simple search theory. We hypothesize, following suggestions of Stigler and Rothschild, that higher risks who expect to pay higher premiums for a given policy will engage in more intensive search than lower risks, given the same distribution of asking prices. As a result, for a given distribution of asking prices, the dispersion of premiums actually paid (transactions prices) will be smaller for higher risks. Therefore, the introduction of an electronic exchange should have a larger potential influence on the dispersion and level of premiums paid for lower risks than for higher risks. We find evidence consistent with each of these hypotheses.

Suggested Citation

  • Mark V. Pauly & Bradley Herring & David Song, 2002. "Health Insurance on the Internet and the Economics of Search," NBER Working Papers 9299, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9299
    Note: HC
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    References listed on IDEAS

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    1. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
    2. Clay, Karen & Krishnan, Ramayya & Wolff, Eric, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-539, December.
    3. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-1130, December.
    4. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva Risso, 2000. "Internet Car Retailing," NBER Working Papers 7961, National Bureau of Economic Research, Inc.
    5. 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.
    6. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
    7. Pauly Mark V. & Herring Bradley & Song David, 2002. "Tax Credits, the Distribution of Subsidized Health Insurance Premiums, and the Uninsured," Forum for Health Economics & Policy, De Gruyter, vol. 5(1), pages 1-22, January.
    8. 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.
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    Citations

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    Cited by:

    1. Fiona Scott Morton, 2006. "Consumer Benefit from Use of the Internet," NBER Chapters,in: Innovation Policy and the Economy, Volume 6, pages 67-90 National Bureau of Economic Research, Inc.
    2. M. Kate Bundorf & Laurence Baker & Sara Singer & Todd Wagner, 2004. "Consumer Demand for Health Information on the Internet," NBER Working Papers 10386, National Bureau of Economic Research, Inc.
    3. Cason, Timothy N. & Friedman, Daniel & Wagener, Florian, 2005. "The dynamics of price dispersion, or Edgeworth variations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 801-822, April.
    4. repec:ams:ndfwpp:03-11 is not listed on IDEAS
    5. repec:eee:joinma:v:25:y:2011:i:3:p:134-144 is not listed on IDEAS
    6. Daniel Bahr & Jürgen Graalmann & Hendrik Jürges & Wolfgang Greiner & Mathias Kifmann & Maximilian Rüger, 2012. "Überschüsse der Krankenkassen und des Gesundheitsfonds: Abschaffung der Praxisgebühren, Beitragssenkung oder Reservenbildung: Was ist sinnvoll?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(23), pages 03-19, December.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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