Price dispersion in the private health insurance industry: The case of Catalonia

This paper presents a vertical and horizontal product differentiation model that explains price dispersion among different kinds of health care insurance firms. Our model shows large insurance firms engaging in price competition with small mutual organizations that serve only a local area and charge lower premiums. We found that, although the market allows the entry of an excessive number of firms, the presence of local insurance companies increases social welfare by increasing the range of products available to consumers. Our conclusions are applicable to OECD countries in general although we rely on Catalonia's data.

► We explain price dispersion among Catalan health-insurance plans. ► Large companies set higher prices and earn higher per-consumer profits. ► The efficient number of firms is smaller than the equilibrium number of firms. ► However, social welfare increases as additional local firms enter the market.