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Dynamic price competition in auto insurance brokerage

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  • Luis H.B. Braido
  • Bruno C.A. Ledo

Abstract

We analyze Brazilian data on auto insurance and document that (a) about 20% of policies are sold without brokerage commission; (b) over 40% are sold at the highest fee allowed; and (c) the remaining contracts are associated with a spread‐out distribution of fees. Static models cannot rationalize these findings. We develop a dynamic model of price competition with search and switching costs that reproduces them. We use the equilibrium structure to estimate the model parameters and infer the brokers' expected earnings, the frequency that insurees switch brokers, and the counterfactual effects of a price ceiling policy.

Suggested Citation

  • Luis H.B. Braido & Bruno C.A. Ledo, 2018. "Dynamic price competition in auto insurance brokerage," RAND Journal of Economics, RAND Corporation, vol. 49(4), pages 914-935, December.
    • Handle: RePEc:bla:randje:v:49:y:2018:i:4:p:914-935
    DOI: 10.1111/1756-2171.12256
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    References listed on IDEAS

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    1. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    2. Baye, Michael R. & Morgan, John, 1999. "A folk theorem for one-shot Bertrand games," Economics Letters, Elsevier, vol. 65(1), pages 59-65, October.
    3. Braido, Luis H.B., 2009. "Multiproduct price competition with heterogeneous consumers and nonconvex costs," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 526-534, September.
    4. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
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    Cited by:

    1. Fabra, Natalia & Reguant, Mar, 2020. "A model of search with price discrimination," European Economic Review, Elsevier, vol. 129(C).
    2. Jason Allen & Robert Clark & Jean-François Houde & Shaoteng Li & Anna Trubnikova, 2023. "The Role of Intermediaries in Selection Markets: Evidence from Mortgage Lending," Staff Working Papers 23-12, Bank of Canada.
    3. Guillermo Marshall, 2020. "Search and Wholesale Price Discrimination," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 346-374, June.
    4. Bruno Cesar Aurichio Ledo, 2011. "Competição Em Preços Entre Corretores Deseguros De Automóveis," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Jason Allen & Shaoteng Li, 2020. "Dynamic Competition in Negotiated Price Markets," Staff Working Papers 20-22, Bank of Canada.

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