Invest-then-Harvest Pricing in Medicare Part D

Individuals face switching frictions in many products, and insurance exchanges are no exception. In a paper forthcoming in the American Economic Journal: Economic Policy, I show that initial defaults have lasting effects in the Medicare Part D prescription drug insurance exchange. Since firms cannot commit to future prices, they should respond to inertia by raising prices on existing enrollees, while introducing cheaper alternative plans. I show that the market displays this pattern: older plans in this market are about 10% more expensive than comparable newly introduced plans.

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