Strategic Price Discrimination in Compulsory Insurance Markets
AbstractThis paper considers price discrimination when competing firms do not observe a customer’s type but only some other variable correlated to it. This is a typical situation in many insurance markets—such as motor insurance—where it is also often the case that insurance is compulsory. We characterise the equilibria and their welfare properties under various price regimes. We show that discrimination based on immutable characteristics such as gender is a dominant strategy, either when firms offer policies at a fixed price or when they charge according to some consumption variable that is correlated to costs. In the latter case, gender discrimination can be an outcome of strategic interaction alone in situations where it would not be adopted by a monopolist. Strategic price discrimination may also increase cross subsidies between types, contrary to expectations. Copyright The Geneva Association 2005
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Bibliographic InfoArticle provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.
Volume (Year): 30 (2005)
Issue (Month): 1 (June)
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Web page: http://www.springerlink.com/link.asp?id=102897
price discrimination; insurance classification; equity; variable insurance charges;
Other versions of this item:
- Luigi Buzzacchi & Tommaso M. Valletti, 2005. "Strategic Price Discrimination in Compulsory Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 30(1), pages 71-97, June.
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- Kesternich, Iris & Schumacher, Heiner, 2009. "On the Use of Information in Repeated Insurance Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 280, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Reimund Schwarze & Thomas Wein, 2005.
"Is the Market Classification of Risk Always Efficient? - Evidence from German Third Party Motor Insurance,"
Working Paper Series in Economics
3, University of Lüneburg, Institute of Economics.
- Schwarze, Reimund & Wein, Thomas, 2005. "Is the market classification of risk always efficient? Evidence from German third party motor insurance," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 1(4), pages 173-202.
- Block, Walter & Snow, Nicholas & Stringham, Edward, 2008. "Banks, insurance companies, and discrimination," MPRA Paper 26035, University Library of Munich, Germany.
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