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

Shiko Maruyama

No 2008-01, Discussion Papers from 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.

Pages: 47 pages
Date: 2008-01
New Economics Papers: this item is included in nep-com, nep-ent, nep-hea, nep-ind and nep-mic
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