Designed to fail : the medicare auction for durable medical equipment
License
Cadmus Permanent Link
Full-text via DOI
ISBN
ISSN
0095-2583
Issue Date
Type of Publication
Keyword(s)
LC Subject Heading
Other Topic(s)
EUI Research Cluster(s)
Initial version
Published version
Succeeding version
Preceding version
Published version part
Earlier different version
Initial format
Author(s)
Citation
Economic inquiry, 2015, Vol. 53, No. 1, pp. 469-485
Cite
CRAMTON, Peter, ELLERMEYER, Sean, KATZMAN, Brett E., Designed to fail : the medicare auction for durable medical equipment, Economic inquiry, 2015, Vol. 53, No. 1, pp. 469-485 - https://hdl.handle.net/1814/51965
Abstract
We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high-cost firms potentially displace low-cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median-price auction with the standard clearing-price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency.
Table of Contents
Additional Information
Online Early publication May 28, 2014