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Dynamic pricing in regulated automobile insurance markets with heterogeneous insurers: Strategies nice versus nasty for customers

Listed author(s):
  • Li, Chu-Shiu
  • Lin, Chih Hao
  • Liu, Chwen-Chi
  • Woodside, Arch G.
Registered author(s):

    This study examines a phenomenon in one nation's automobile insurance market where insurers adopt diverse pricing strategies in this regulated industry that does not allow for such diversions—a homogeneous, insurance industry in which a government authority sets the official pricing formula as well as all of the rating factors. Insurers use a claim coefficient that reflects previous claim records of policyholder as an implicit pricing tool to over/under charge new and repeat customers. The aim here is not so much to blow-the-whistle on pricing practices that violate regulations but to describe execution details of the practices and their outcomes. The results show that firm-level, systematic, price variances that occur differ from prices that follow from applying regulated individual-claim coefficients. Based on the unique firm-level pricing strategies, this study finds that some insurers are more nice to new customers and nasty to repeat customers to increase market shares while other insurers earn high profits by being nasty to repeat customers. The assumption that a behavioral primacy effect may exist in the market may guide some firms' pricing strategies.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148296311001329
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    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 65 (2012)
    Issue (Month): 7 ()
    Pages: 968-976

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    Handle: RePEc:eee:jbrese:v:65:y:2012:i:7:p:968-976
    DOI: 10.1016/j.jbusres.2011.04.015
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbusres

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    1. Shapira, Zur & Venezia, Itzhak, 2008. "On the preference for full-coverage policies: Why do people buy too much insurance?," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 747-761, November.
    2. Alma Cohen, 2012. "Asymmetric Learning in Repeated Contracting: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 419-432, May.
    3. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-438, April.
    4. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    5. A. M. McGahan & Pankaj Ghemawat, 1994. "Competition to Retain Customers," Marketing Science, INFORMS, vol. 13(2), pages 165-176.
    6. Chu-Shiu Li & Chih Hao Lin & Chwen-Chi Liu & Emilio Venezian, 2010. "Pricing Effectiveness and Regulation: An Examination of Premium Rating in Taiwan Automobile Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(S1), pages 68-81, December.
    7. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
    8. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
    9. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    10. Woodside, Arch G. & Uncles, Mark D., 2005. "How Behavioral Primacy Interacts with Short-Term Marketing Tactics to Influence Subsequent Long-Term Brand Choice," Journal of Advertising Research, Cambridge University Press, vol. 45(02), pages 229-240, June.
    11. Bourgeon, Jean-Marc & Picard, Pierre & Pouyet, Jerome, 2008. "Providers' affiliation, insurance and collusion," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 170-186, January.
    12. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
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