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Turnover and Regulation: The Chilean Pension Fund Industry

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  • Solange Berstein
  • Alejandro Micco

Abstract

We study price competition in a model with differentiated products and searching costs. In this model firms charge a price above marginal costs. This positive mark-up gives firms incentive to steal consumers from their rivals. For this purpose, firms hire sales agents that contact customers personally to switch them from one firm to another and offer rewards to the switchers. These rewards can be interpreted as a price cut to rival's customers, which is a form of price discrimination in this model. This model is applied to the Chilean pension funds industry. In 1995 there was more than one sales agent per two hundred customers with a turnover between Pension Fund Administrators of more than 50 percent. This high turnover was associated with large costs, and the authorities reacted by imposing restrictions to switching by the end of 1997. The empirical section of the paper attempts to analyze the role of sales agents in this industry and the impact of such restrictions.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 180.

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Date of creation: Sep 2002
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Handle: RePEc:chb:bcchwp:180

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References

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  1. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
  2. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  3. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, 06.
  4. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  5. Solange Berstein, 2002. "Two-Part Tariff Competition With Switching Costs and Sales Agents," Working Papers Central Bank of Chile 162, Central Bank of Chile.
  6. Tore Nilssen, 1992. "Two Kinds of Consumer Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 579-589, Winter.
  7. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  8. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  9. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
  10. repec:chb:bcchwp:04 is not listed on IDEAS
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Cited by:
  1. Solange Berstein Jáuregui & Carolina Cabrita Felix, 2007. "Los determinantes de la elección de AFP en Chile: nueva evidencia a partir de datos individuales," Estudios de Economia, University of Chile, Department of Economics, vol. 34(1 Year 20), pages 53-72, June.
  2. Heinz Rudolph & Roberto Rocha, 2007. "Competition and Performance in the Polish Second Pillar," World Bank Publications, The World Bank, number 6775, January.
  3. David Bravo Urrutia & Olivia S. Mitchell & Petra Todd, 2007. "Learning from the Chilean Experience: The Determinants of Pension Switching," Working Papers wp266, University of Chile, Department of Economics.
  4. Jorge Tarziján M, 2005. "Evaluación de la Autorización de Planes de Precio por Permanencia a las AFP," Working Papers 10, Superintendencia de Pensiones, revised Aug 2005.
  5. Heinz Rudolph & Hela Cheikhrouhou & Roberto Rocha & Craig Thorburn, 2007. "Financial Sector Dimensions of the Colombian Pension System," World Bank Publications, The World Bank, number 6785, January.
  6. Solange Berstein & José Luis Ruiz V, 2005. "Sensibilidad de la Demanda con Consumidores Desinformados: El Caso de las AFP en Chile," Working Papers 4, Superintendencia de Pensiones, revised Apr 2005.
  7. World Bank & International Monetary Fund, 2006. "Financial Sector Assessment Program Update : Republic of Poland - Competition and Performance in the Polish Second Pillar," World Bank Other Operational Studies 16052, The World Bank.

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