Volume 20, Issue 4

Certain health insurers offer a free choice of providers and an identical copayment regardless of the provider. Others build networks and use selective contracting and financial incentives to channel policyholders to contracted suppliers. In the case of unregulated prices, we compare these two policies when the off-network medical service is not covered. We show how policy ranking depends on the characteristics of demand. If demand is linear, a for-profit insurer and a not-for-profit insurer obtain a higher profit and utility under selective contracting than under uniform reimbursement. In the constant elasticity case, these results do not hold. Insurers prefer uniform reimbursement while consumers are better off under selective contracting in both cases.

Routine industrial analyses use internal market characteristics such as market shares to proxy for market power. However, recent studies argue that factors that are external to the market such as contact across multiple markets can be linked to tacit collusion. Using a structural demand and supply model for air travel, we quantify the variable profit effects of multimarket contact. We find that multimarket contact results in increases in variable profits ranging between $15,000 and $20,000 per contact in a quarter. Extrapolating this estimate across all contacts proves to be quite sizeable. These positive responses in profitability are especially stronger in less competitive markets. Our results, taken together, lend support to the mutual forbearance hypothesis.