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Strategic Price Discrimination in Compulsory Insurance Markets

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Author Info

  • Luigi Buzzacchi

    (Politecnico di Torino and CERAP–Università Bocconi, DSPEA, Corso Duca degli Abruzzi 24, 10129 Torino, Italy, e-mail: luigi.buzzacchi@polito.it)

  • Tommaso M. Valletti

    (Imperial College London and CEPR, Tanaka Business School, South Kensington Campus, London SW7 2AZ, UK, e-mail: t.valletti@ic.ac.uk, URL: www.imperial.ac.uk/people/t.valletti)

Abstract

This 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. The Geneva Risk and Insurance Review (2005) 30, 71–97. doi:10.1007/s10836-005-1110-7

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Risk and Insurance Review.

Volume (Year): 30 (2005)
Issue (Month): 1 (June)
Pages: 71-97

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Handle: RePEc:pal:genrir:v:30:y:2005:i:1:p:71-97

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Cited by:
  1. Block, Walter & Snow, Nicholas & Stringham, Edward, 2008. "Banks, insurance companies, and discrimination," MPRA Paper 26035, University Library of Munich, Germany.
  2. 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.
  3. 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.

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