Differentiation and Competition in HMO Markets

Abstract

This paper examines how differentiation among Health Maintenance Organizations (HMOs) affects local market competition. Most markets for HMOs appear sufficiently unconcentrated; however, differences among HMOs may make competition less intense than the number of competitors would suggest. To investigate this possibility, we distinguish HMOs that serve only local markets from those that operate regional or national networks. We analyze how HMOs of one type affect the profitability of the other using an equilibrium model of entry and product choice. While the two types of HMOs have strong competitive effects within segments, the competitive effect of differentiated firms is negligible.