Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, December 3, 2013

How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange

Keith M. Marzilli Ericson (Boston University) and Amanda Starc (Wharton School) explain How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange.

ABSTRACT: Standardization of complex products is touted as improving consumer decisions and intensifying price competition, but evidence on standardization is limited. We examine a natural experiment: the standardization of health insurance plans on the Massachusetts Health Insurance Exchange. Prestandardization, firms had wide latitude to design plans. A regulatory change then required firms to standardize the cost-sharing parameters of plans and offer seven defined options; plans remained differentiated on network, brand,and price. Standardization led consumers on the HIX to choose more generous health insurance plans and led to substantial shifts in brands' market shares. We decompose the sources of this shift into three effects: price, product availability, and valuation. A discrete choice model shows that standardization changed the weights consumers attach to plan attributes (a valuation effect), increasing the salience of tier. The availability effect explains the bulk of the brand shifts. Standardization increased consumer welfare in our models, but firms captured some of the surplus by reoptimizing premiums. We use hypothetical choice experiments to replicate the effect of standardization and conduct alternative counterfactuals.

http://lawprofessors.typepad.com/antitrustprof_blog/2013/12/how-product-standardization-affects-choice-evidence-from-the-massachusetts-health-insurance-exchange.html

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