Price Variation in Markets with Homogeneous Goods The Case of Medigap

Nicole Maestas, Mathis Schroeder and Dana Goldman

No WR-504, Working Papers from RAND Corporation

Abstract: About one-third of elderly Americans age 65 and older supplements their Medicare health insurance in a private insurance market known as the “Medigap” market. Prices for Medigap policies vary widely, despite the fact that regulations enacted in 1992 standardized all Medigap policies, thereby creating a market with homogenous insurance products. Economic theory suggests that consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), the authors find that nearly all consumers face search costs high enough to prevent them from searching until they find the lowest priced Medigap policy. They estimate average search costs to be $249, substantially higher than has been found in other markets, but plausible given the complex nature of the Medigap market and its elderly consumer population. The implied aggregate welfare loss is approximately $798 million or $484 per policyholder.

Keywords: health insurance; medigap; elderly (search for similar items in EconPapers)
JEL-codes: G22 I11 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2007-08
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Related works:
Working Paper: Price Variation in Markets with Homogeneous Goods: The Case of Medigap (2009)
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