Measuring The Welfare Effect Of Entry In Differentiated Product Markets: The Case Of Medicare HMOs

Should governments subsidize entry to promote competition? In general, theory models cannot determine whether entry under the free-entry condition is socially excessive, optimal, or insufficient. In this paper the author proposes an empirical framework to evaluate welfare consequences of policy intervention through entry in differentiated product markets, with a case study of the US Medicare HMO market. In endogenizing firms' entry-exit decision, a technical breakthrough is to explicitly incorporate firm heterogeneity by employing a sequential move game. This enables to exploit detailed firm level data and makes policy simulations relevant.