Insurance markets often contain pricing regulation, such as community rating. I examine how pricing regulation interacts with imperfect competition.
(http://www.nber.org/papers/w18089.pdf, joint with Amanda Starc). Update: Now forthcoming, Review of Economics and Statistics. http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00514
When markets are imperfectly competitive, these regulations link prices for consumers that differ not only in costs, but also in preferences. Tightening community rating regulation doesn’t merely move the price toward the average cost, since firms price to the marginal enrollee. As a result, community rating regulation can affect firm profits and market efficiency. We look at the Massachusetts Health Insurance Exchange (HIX), and show that younger individuals are much more price sensitive than older individuals. Thus, insurers should charge higher markups on older individuals. Tighter community rating restrictions transfer money from younger consumers to older consumers, but also from firm profits to consumer surplus.