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When Social Assistance Meets Market Power: A Mixed Duopoly View of Health Insurance in the United States

Author

Listed:
  • Ranasinghe, Ashantha

    (University of Alberta, Department of Economics)

  • Su, Xuejuan

    (University of Alberta, Department of Economics)

Abstract

We develop a mixed duopoly model with quality-differentiated products. The public firm chooses its product quality and offers it for free to eligible individuals as a form of social assistance to maximize consumer welfare, while the private firm chooses both the product quality and price to maximize profit. We first characterize the pattern of market segmentation for given product offerings, highlighting the non-monotonic relationship between market participation and individual income. We then calibrate the model to health insurance for the U.S. working-age population, with Medicaid acting as the public firm. We examine the distributional implications of policy changes, both actual and hypothetical, that lead to various degrees of public program expansion. Despite potentially significant inefficiency of the public firm, the overall effect of its expansion is welfare improving. Central to these findings is the significant market power enjoyed by the private firm that results in high profit margins if left unchecked. As more individuals become eligible for the public program, the resulting increase in competitive pressure disciplines the private firm’s ability to exercise market power.

Suggested Citation

  • Ranasinghe, Ashantha & Su, Xuejuan, 2021. "When Social Assistance Meets Market Power: A Mixed Duopoly View of Health Insurance in the United States," Working Papers 2021-1, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2021_001
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    References listed on IDEAS

    as
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    3. Roozbeh Hosseini & Kai Zhao & Karen Kopecky, 2018. "How Important Is Health Inequality for Lifetime Earnings Inequality?," 2018 Meeting Papers 1093, Society for Economic Dynamics.
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    7. Hejer Lasram & Didier Laussel, 2019. "The determination of public tuition fees in a mixed education system: A majority voting model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(6), pages 1056-1073, December.
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    More about this item

    Keywords

    mixed duopoly; quality differentiation; public provision of private goods; funding of public services; distribution;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • I00 - Health, Education, and Welfare - - General - - - General
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy

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