Price Variation in Markets with Homogeneous Goods: the Case of Medigap

49 Pages Posted: 2 Feb 2009 Last revised: 12 Aug 2010

See all articles by Nicole Maestas

Nicole Maestas

Harvard Medical School - Department of Health Care Policy

Mathis Fräßdorf

German Institute for Economic Research (DIW)

Dana P. Goldman

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: January 2009

Abstract

Nearly 30 percent of Americans age 65 and older supplement their Medicare health insurance through the Medigap private insurance market. We show that prices for Medigap policies vary widely, despite the fact that all plans are standardized, and even after controlling for firm heterogeneity. Economic theory suggests that heterogeneous 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), we estimate average search costs to be $72. We argue that information problems arise from the complexity of the insurance product and lead individuals to rely on insurance agents who do not necessarily guide them to the lowest prices.

Suggested Citation

Maestas, Nicole and Fräßdorf, Mathis and Goldman, Dana P., Price Variation in Markets with Homogeneous Goods: the Case of Medigap (January 2009). NBER Working Paper No. w14679. Available at SSRN: https://ssrn.com/abstract=1336098

Nicole Maestas

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Avenue
Boston, MA 02115
United States

Mathis Fräßdorf

German Institute for Economic Research (DIW) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+493089789222 (Phone)

Dana P. Goldman (Contact Author)

RAND Corporation ( email )

P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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