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Strategic Price Discrimination in Compulsory Insurance Markets

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  • Luigi Buzzacchi
  • Tommaso Valletti

Abstract

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

Suggested Citation

  • Luigi Buzzacchi & Tommaso Valletti, 2005. "Strategic Price Discrimination in Compulsory Insurance Markets," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 71-97, June.
  • Handle: RePEc:kap:geneva:v:30:y:2005:i:1:p:71-97
    DOI: 10.1007/s10836-005-1110-7
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    Cited by:

    1. Block, Walter & Snow, Nicholas & Stringham, Edward, 2008. "Banks, insurance companies, and discrimination," MPRA Paper 26035, University Library of Munich, Germany.
    2. Schwarze, Reimund & Wein, Thomas, 2005. "Is the market classification of risk always efficient? Evidence from German third party motor insurance," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 1(4), pages 173-202.
    3. Kesternich, Iris & Schumacher, Heiner, 2009. "On the Use of Information in Repeated Insurance Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 280, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Georges Dionne & Casey Rothschild, 2014. "Economic Effects of Risk Classification Bans," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 184-221, September.
    5. Cannon, Edmund & Cipriani, Giam Pietro & Bazar-Rosen, Katia, 2014. "Surprising Selection Effects in the UK Car Insurance Market," IZA Discussion Papers 8172, Institute of Labor Economics (IZA).
    6. Imke Reimers & Benjamin R. Shiller, 2018. "Proprietary Data, Competition, and Consumer Effort: An Application to Telematics in Auto Insurance," Working Papers 119, Brandeis University, Department of Economics and International Businesss School.
    7. Ron Cheung & Cassandra R. Cole & David A. Macpherson & Kathleen A. McCullough & Charles Nyce, 2015. "Demographic Factors and Price Distortions in Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(1), pages 1-28, March.

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