Estimating the Extent of Patient Ignorance of the Health Care Market

The wide dispersion observed in prices for health services in seemingly com- petitive markets is not fully explained by physician or consumer characteris- tics, 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 equi- libria 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.