Price Variation in Markets with Homogeneous Goods
The Case of Medigap
Published In: NBER Working Papers, no. 14679 / (Cambridge, MA: National Bureau of Economic Research, Jan. 2009), 47 p
Posted on RAND.org on January 01, 2009
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.