Estimating Dynamic Discrete Choice Models of Product Differentiation: An Application to Medicare Part D with Switching Costs

Author

Daniel P. MILLER, Clemson University
Jungwon YEO, Singapore Management UniversityFollow

Publication Type

Working Paper

Version

publishedVersion

Publication Date

11-2012

Abstract

This paper proposes an algorithm to estimate dynamic discrete choice models using aggregate market share data. The algorithm achieves a computational advantage by decomposing the complicated mapping between market shares and utility flows into two simpler ones. The first maps observed market shares to mean choice specific values, and the second then maps to mean utility flows. In the application, we estimate switching costs in the Medicare Part D market. Our results indicate a large switching cost of around $1,700, which implies an average welfare loss of $480 as enrollees choose to remain in sub-optimal plans to avoid switching costs.

Discipline

Economics | Health Economics

First Page

1

Last Page

47

Citation

MILLER, Daniel P. and YEO, Jungwon. Estimating Dynamic Discrete Choice Models of Product Differentiation: An Application to Medicare Part D with Switching Costs. (2012). 1-47.
Available at: https://ink.library.smu.edu.sg/soe_research/1569

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

http://www.mysmu.edu/faculty/jwyeo/papers/DynamicBerry_PartDSwitching2012.pdf