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Designed to Fail: The Medicare Auction for Durable Medical Equipment

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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.

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  • 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
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    1. 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.
    2. Cramton Peter & Katzman Brett E, 2010. "Reducing Healthcare Costs Requires Good Market Design," The Economists' Voice, De Gruyter, vol. 7(4), pages 1-4, October.
    3. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
    4. 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.
    5. 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.
    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, President and Fellows of Harvard College, vol. 127(2), pages 793-827.
    7. 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.
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    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. Ehrhart, Karl-Martin & Hanke, Ann-Katrin & Ott, Marion, 2020. "A small volume reduction that melts down the market: Auctions with endogenous rationing," ZEW Discussion Papers 20-014, ZEW - Leibniz Centre for European Economic Research.
    3. Tan, Lijia & Wei, Lijia, 2020. "Evaluating car license auction mechanisms: Theory and experimental evidence," China Economic Review, Elsevier, vol. 60(C).
    4. 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.
    5. Peter Cramton, 2012. "Medicare Auction Reform," Papers of Peter Cramton 12cmaft, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
    6. Lijia Tan & Lijia Wei, 2014. "Car License Auction: Theory and Experimental Evidence," Working Papers 1401, Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory, revised 02 Sep 2014.
    7. Alcalde, José & Dahm, Matthias, 2019. "Dual sourcing with price discovery," Games and Economic Behavior, Elsevier, vol. 115(C), pages 225-246.

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    More about this item

    Keywords

    Medicare auctions; health care auctions; procurement auctions;
    All these keywords.

    JEL classification:

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

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