Collusion in a One-Period Insurance Market with Adverse Selection
AbstractWe show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model --this shows that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints-- and we assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they had reduced the coverage offered to their customers and as a result significantly raised their profits. Our model is consistent with this accusation
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Bibliographic InfoPaper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv196.
Length: 17 pages
Date of creation: Dec 2007
Date of revision:
Other versions of this item:
- Willington Manuel & Alegría Alexander, 2012. "Collusion in a One-Period Insurance Market with Adverse Selection," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, April.
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-COM-2008-03-08 (Industrial Competition)
- NEP-CTA-2008-03-08 (Contract Theory & Applications)
- NEP-IAS-2008-03-08 (Insurance Economics)
- NEP-IND-2008-03-08 (Industrial Organization)
- NEP-MIC-2008-03-08 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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