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Health Insurance and Competition in Health Care Markets

Gilad Sorek

No auwp2015-03, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: I study duopolistic market for differentiated medical products. Medical providers decide whether to sell on the spot market to sick consumers or to sell through competitive insurance market to healthy consumers. While shopping for insurance consumers know only the distribution of possible medical needs they may have if they get sick. Only when getting sick their actual medical need reveals and diagnosed. Hence consumers on the insurance market have lower taste differentiation than the sick consumers who are shopping on the spot market. I find that in equilibrium providers sell only on the insurance market, even though this intensifies competition because of lower taste differentiation. Competition between providers under insurance sales brings premiums low enough to motivate consumers buying insurance for both products. Insurance sales generate efficient horizontal product differentiation, lower prices, and efficiently higher quality.

Keywords: Insurance; Non-linear Pricing; Option Demand; Differentiation (search for similar items in EconPapers)
JEL-codes: I11 I13 L1 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-com, nep-hea, nep-ias and nep-mkt
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