Competition and Product Choice in Option Demand Markets

Abstract

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.