Product Proliferation under Rational Inattention: Application to Health Insurance
- (pp. 554-59)
AbstractIn markets with complicated products such as insurance, why do firms offer many products even when consumers appear to receive little benefit? We show that when consumers face information acquisition costs, firms may have an incentive to introduce many undifferentiated products. This allows firms to gain market share and increase markups. We document initial evidence consistent with the model using data from Medicare prescription drug insurance. Insurers that offer more duplicate or similar plans have higher-cost plans. These results suggest a role for policymakers to restrict product proliferation in markets with complicated products.
CitationBrown, Zach Y., and Jihye Jeon. 2021. "Product Proliferation under Rational Inattention: Application to Health Insurance." AEA Papers and Proceedings, 111: 554-59. DOI: 10.1257/pandp.20211082
- I13 Health Insurance, Public and Private
- G22 Insurance; Insurance Companies; Actuarial Studies
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness