Estimating Dynamic Discrete Choice Models of Product Differentiation: An Application to Medicare Part D with Switching Costs

• Main Authors: MILLER, Daniel P., YEO, Jungwon
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Economics; Health Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1569; https://ink.library.smu.edu.sg/context/soe_research/article/2568/viewcontent/Yeo_DynamicBerry_PartDSwitching2012.pdf
• Institution: Singapore Management University

This paper proposes an algorithm to estimate dynamic discrete choice models using aggregate market share data. The algorithm achieves a computational advantage by decomposing the complicated mapping between market shares and utility flows into two simpler ones. The first maps observed market shares to mean choice specific values, and the second then maps to mean utility flows. In the application, we estimate switching costs in the Medicare Part D market. Our results indicate a large switching cost of around $1,700, which implies an average welfare loss of $480 as enrollees choose to remain in sub-optimal plans to avoid switching costs.