Competition and Product Choice in Option Demand Markets

Gilad Sorek

No auwp2015-11, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This paper provides first analysis of horizontal product differentiation in health care markets with option demand. I show that differentiation choices in option demand market differ from those obtained in spot markets analyzes. This is because option demand induces competition over inclusion under insurance coverage, whereas in spot markets providers are competing over the marginal consumers. In addition providers that are perceived as substitutes in the spot market - after exact medical needs reveal, may be perceived as complements in option market - before actual medical needs emerged. I show that in the model option demand market competition in simultaneous moves yields efficient horizontal differentiation and excessive investment in quality. Moreover I show that sequential moves result in asymmetric equilibrium with first mover-gains to the leading provider, too little horizontal differentiation and yet higher expected utility for consumers (compared with simultaneous moves).

Keywords: Health Insurance; Option Demand; Product Differentiation (search for similar items in EconPapers)
JEL-codes: I11 I13 L1 (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-com, nep-ias, nep-ind and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Competition and Product Choice in Option Demand Markets (2016)
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