Individuals face switching frictions in many products, and insurance exchanges are no exception. In a paper published 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.
- See the paper: “Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange“, American Economic Journal: Economic Policy 2014.
- See the working paper at www.nber.org/papers/w18359
- See a discussion in the Kaiser Health News blog