IDEAS home Printed from https://ideas.repec.org/p/pcc/pccumd/12cekdtf.html
   My bibliography  Save this paper

Designed to Fail: The Medicare Auction for Durable Medical Equipment

Author

Abstract

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unusual features of the Medicare auction are 1) bids are non-binding and 2) winners are paid the median winning bid. These two features lead to complete market failure. Lowball bids result in a price that is below each bidder’s cost, so no quantity is supplied. In sharp contrast, the standard clearing-price auction has each bidder bid true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. Recent Caltech experiments (Merlob, Plott, and Zhang 2012) confirm these theoretical findings.

Suggested Citation

  • Peter Cramton, 2012. "Designed to Fail: The Medicare Auction for Durable Medical Equipment," Papers of Peter Cramton 12cekdtf, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
  • Handle: RePEc:pcc:pccumd:12cekdtf
    as

    Download full text from publisher

    File URL: http://www.cramton.umd.edu/papers2010-2014/cramton-ellermeyer-katzman-medicare-auction-designed-to-fail.pdf
    File Function: Full text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter Cramton & Emel Filiz-Ozbay & Erkut Ozbay & Pacharasut Sujarittanonta, 2012. "Discrete clock auctions: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 15(2), pages 309-322, June.
    2. Kagel, John H & Levin, Dan, 2001. "Behavior in Multi-unit Demand Auctions: Experiments with Uniform Price and Dynamic Vickrey Auctions," Econometrica, Econometric Society, vol. 69(2), pages 413-454, March.
    3. Coppinger, Vicki M & Smith, Vernon L & Titus, Jon A, 1980. "Incentives and Behavior in English, Dutch and Sealed-Bid Auctions," Economic Inquiry, Western Economic Association International, vol. 18(1), pages 1-22, January.
    4. Kagel, John H & Levin, Dan, 1993. "Independent Private Value Auctions: Bidder Behaviour in First-, Second- and Third-Price Auctions with Varying Numbers of Bidders," Economic Journal, Royal Economic Society, vol. 103(419), pages 868-879, July.
    5. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
    6. Brian Merlob & Charles R. Plott & Yuanjun Zhang, 2012. "The CMS Auction: Experimental Studies of a Median-Bid Procurement Auction with Nonbinding Bids," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 793-827.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jose Alcalde & Matthias Dahm, 2016. "Proportional payoffs in legislative bargaining with weighted voting: a characterization," Discussion Papers 2016-03, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    2. John Kautter & Gregory Pope, 2014. "Competitive bidding for Medicare Part B clinical laboratory services," International Journal of Health Economics and Management, Springer, vol. 14(2), pages 95-108, June.
    3. Alcalde, Jose & Dahm, Mathias, 2016. "Dual Sourcing with Price Discovery," QM&ET Working Papers 16-1, University of Alicante, D. Quantitative Methods and Economic Theory.

    More about this item

    Keywords

    Medicare auctions; health care auctions; procurement auctions;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pcc:pccumd:12cekdtf. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Cramton). General contact details of provider: http://www.cramton.umd.edu .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.