Estimating switching costs with market share data: an application to Medicare Part D

Choice inertia and switching frictions are well-documented features of the demand for health insurance. In this paper, we estimate switching costs in the Medicare Part D market with aggregate market share data using standard discrete choice models for differentiated products. We consider various modelling assumptions: myopic and forward-looking consumers, and with and without random coefficients. Both myopic and forward-looking consumer models with no random coefficients yield switching cost estimates that closely match the actual average switching frequency, with implied dollar-valued switching costs of $1600 to $2000. We find the inclusion of random coefficients to the myopic consumer model results in smaller estimates of switching costs, but only at the expense of the model’s fit to the switching frequency. The estimated welfare losses from switching frictions are large, but they are smaller under the forward-looking consumer model, amounting to around $500 per enrollee annually, compared to over $1000 under the myopic model.