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Competition and Product Choice in Option Demand Markets

Author

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  • Sorek Gilad

    (Economics Department, Auburn University, 0334 Haley Center, Auburn, AL 36849, USA)

Abstract
This work presents the first analysis of competition through horizontal and vertical differentiation in option demand markets, which are common in the health-care sector. I studied two alternative market structures: (a) a “pure” option demand market where medical providers sell insurance directly to consumers and (b) a public insurance regime where the public insurer bargains over prices with providers before bundling both products under a single insurance policy. I show that (a) product choices in option demand markets differ greatly from those in respective spot markets and (b) bundling medical products under a single insurance policy alters product choices and equilibrium prices in a way that does not benefit consumers.

Suggested Citation

  • Sorek Gilad, 2016. "Competition and Product Choice in Option Demand Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 785-805, April.
    • Handle: RePEc:bpj:bejeap:v:16:y:2016:i:2:p:785-805:n:19
    DOI: 10.1515/bejeap-2015-0164
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    References listed on IDEAS

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    1. Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. "Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-763, Winter.
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    6. Brekke, Kurt R. & Konigbauer, Ingrid & Straume, Odd Rune, 2007. "Reference pricing of pharmaceuticals," Journal of Health Economics, Elsevier, vol. 26(3), pages 613-642, May.
    7. Sorek Gilad, 2016. "Competition and Product Choice in Option Demand Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 785-805, April.
    8. Pedro Pita Barros & Xavier Martinez‐Giralt, 2002. "Public and Private Provision of Health Care," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(1), pages 109-133, March.
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    11. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
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    19. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227.
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    22. Gilad Sorek, 2015. "Location and Product Choice in Option Demand Markets," Auburn Economics Working Paper Series auwp2015-07, Department of Economics, Auburn University.
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    Cited by:

    1. Sorek Gilad, 2016. "Competition and Product Choice in Option Demand Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 785-805, April.
    2. Sorek, Gilad, 2016. "Competition and consumer choice in option demand markets," Economics Letters, Elsevier, vol. 146(C), pages 13-16.

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    More about this item

    Keywords

    medical insurance; option demand; product differentiation;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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