Differentiation and Competition in HMO Markets

This paper examines the effect of differentiation among Health Maintenance Organizations (HMOs) on local market competition. Most markets for HMOs appear to be sufficiently unconcentrated when considered in aggregate; however, differences among HMOs may allow for higher margins than one would expect given the number of competitors. To investigate this possibility, we divide HMOs into those that serve only the local area, and those that serve a larger regional or national area. We then analyze the extent to which one type of HMO affects the local market structure of the other using an equilibrium model of entry and product choice. We find that the two types of HMOs have strong competitive effects within segments, but that the competitive effect of differentiated firms is negligible.