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Measuring the Welfare Effect of Entry in Differentiated Product Markets: The Case of Medicare HMOs

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  • Shiko Maruyama

    () (School of Economics, The University of New South Wales)

Abstract

Should governments subsidize entry to promote competition? In general, theory models cannot determine whether entry under the free-entry condition is socially excessive, optimal, or insufficient. In this paper I propose an empirical framework to evaluate welfare consequences of policy intervention through entry in differentiated product markets, with a case study of the US Medicare HMO market. In endogenizing firms' entry-exit decision, a technical breakthrough is to explicitly incorporate firm heterogeneity by employing a sequential move game. This enables us to exploit detailed firm level data and makes policy simulations relevant. I find no evidence of socially excessive entry. The government may achieve higher social welfare by expanding the program.

Suggested Citation

  • Shiko Maruyama, 2008. "Measuring the Welfare Effect of Entry in Differentiated Product Markets: The Case of Medicare HMOs," Discussion Papers 2008-01, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2008-01
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
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    3. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    4. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    5. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, pages 397-420.
    6. Town, Robert & Liu, Su, 2003. " The Welfare Impact of Medicare HMOs," RAND Journal of Economics, The RAND Corporation, pages 719-736.
    7. Paul Contoyannis & Andrew M. Jones & Roberto Leon-Gonzalez, 2004. "Using simulation-based inference with panel data in health economics," Health Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 101-122.
    8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, pages 242-262.
    9. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, pages 221-242.
    10. Patrick Bajari & Han Hong & Stephen Ryan, 2004. "Identification and Estimation of Discrete Games of Complete Information," NBER Technical Working Papers 0301, National Bureau of Economic Research, Inc.
    11. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, pages 397-420.
    12. Leemore Dafny & David Dranove, 2008. "Do report cards tell consumers anything they don't already know? The case of Medicare HMOs," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 790-821.
    13. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 833-882.
    14. Town, Robert & Liu, Su, 2003. " The Welfare Impact of Medicare HMOs," RAND Journal of Economics, The RAND Corporation, pages 719-736.
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    Cited by:

    1. Shiko Maruyama, 2009. "Estimating Sequential-move Games by a Recursive Conditioning Simulator," Discussion Papers 2009-01, School of Economics, The University of New South Wales.

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