Publication Type

Journal Article

Version

publishedVersion

Publication Date

11-2018

Abstract

Choice inertia and switching frictions are well-documented features of the demand for health insurance. In this paper, we estimate switching costs in the Medicare Part D market with aggregate market share data using standard discrete choice models for differentiated products. We consider various modelling assumptions: myopic and forward-looking consumers, and with and without random coefficients. Both myopic and forward-looking consumer models with no random coefficients yield switching cost estimates that closely match the actual average switching frequency, with implied dollar-valued switching costs of $1600 to $2000. We find the inclusion of random coefficients to the myopic consumer model results in smaller estimates of switching costs, but only at the expense of the model’s fit to the switching frequency. The estimated welfare losses from switching frictions are large, but they are smaller under the forward-looking consumer model, amounting to around $500 per enrollee annually, compared to over $1000 under the myopic model.

Keywords

Switching costs, Discrete choice model, Medicare part D

Discipline

Economics | Industrial Organization

Publication

International Journal of Industrial Organization

Volume

61

First Page

459

Last Page

501

ISSN

0167-7187

Identifier

10.1016/j.ijindorg.2018.08.005

Publisher

Elsevier

Additional URL

https://doi.org/10.1016/j.ijindorg.2018.08.005

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