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Elisabeth Stoeckl, LMU; Andreas Richter, LMU; Jörg Schiller, Hohenheim University
Incomplete insurance contracts and imperfect competition between suppliers lead to price increases and overcharging bills in repair and healthcare markets. We use a theoretical model to study the effect of insurance and claims auditing on pricing and overcharging in markets for repair goods. We focus our analysis on oligopolistic repair markets where suppliers determine the prices for their goods, insured consumers do not know what treatment they need and therefore require the recommendation of a repair firm, and insurers may audit suspicious claims to detect overcharging recommendations. Our results indicate that a small coinsurance rate on the side of consumers results in high and treatment-specific repair prices, frequent audits, and occasional overcharging. A high coinsurance rate comes along with insurers foregoing audits and a constant average price for different repair treatments. On the one hand, claims auditing prevents a general overpaying of consumers with minor damages and deters repair firms from permanent overcharging. On the other hand, claims auditing leads to a welfare loss due to audit costs and penalties for repair firms.
