Figure 2.

Two simple models of plan bidding.

This figure illustrates the different predictions of the perfect competition model and models of imperfect competition. In panel A, a $1 change in the benchmark payment rate (pay) does not affect the bid, consistent with plans bidding their costs (zero-profit condition) in a perfectly competitive market. Given the design of the bidding system, we would expect Δrebate/Δpay >0 and Δpremium/Δpay < 0. In contrast, panel B illustrates a situation in which a $1 change in the benchmark is reflected in a $1 change in the bid, consistent with a monopoly plan extracting the surplus. In this case, we would expect Δrebate/Δpay =0 and Δpremium/Δpay =0.