Estimating the Extent of Patient Ignorance of the Health Care Market

The wide dispersion observed in prices for health services in seemingly competitive markets is not fully explained by physician or consumer characteristics, or by variations in quality of care. For a variety of reasons, including the urgent nature of consumption and the asymmetry of information, patients in the market for health services face high search costs. They balance the prospect of finding a physician willing to accept lower fees against the greater costs involved with the gathering of information and the search for such a physician. At the same time, physicians also balance the prospect of securing a higher fee against losing the patient. In either or both of these cases, stable market equilibria may exist with the same physician charging different fees to different consumers, and with different physicians charging different prices, even if the service provided is fairly homogenous and standard. Mukesh Chawla ([email protected]) is a Senior Human Development Economist in the Europe and Central Asia vice presidency of the World Bank. The findings, interpretation, and conclusions are the author’s own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. World Bank Economists’ Forum Vol. 2 (2002), pp. 3–24.