Strategic Price Discrimination in Compulsory Insurance Markets
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. Copyright The Geneva Association 2005
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- Schmalensee, Richard, 1984. "Imperfect Information and the Equitability of Competitive Prices," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 441-60, August.
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- Kavalec, Chris & Woods, James, 1999. "Toward marginal cost pricing of accident risk: the energy, travel, and welfare impacts of pay-at-the-pump auto insurance," Energy Policy, Elsevier, vol. 27(6), pages 331-342, June.
- Crocker, Keith J & Snow, Arthur, 1986. "The Efficiency Effects of Categorical Discrimination in the Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 321-44, April.
- Hoy, Michael, 1989. "The value of screening mechanisms under alternative insurance possibilities," Journal of Public Economics, Elsevier, vol. 39(2), pages 177-206, July.
- Bond, Eric W & Crocker, Keith J, 1991. "Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 177-200, February.
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