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Insurance market games: Scale effects and public policy

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  • Michael Powers
  • Martin Shubik
  • Shun Yao

Abstract

We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model, we present a one-period game in which both the buyers and sellers of insurance make strategic bids, and show that, under reasonably broad conditions, market equilibrium exists. For a special case, we then consider how both the price and quantity of insurance, as well as other quantities of interest to public policy decision makers, are affected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.
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Suggested Citation

  • Michael Powers & Martin Shubik & Shun Yao, 1998. "Insurance market games: Scale effects and public policy," Journal of Economics, Springer, vol. 67(2), pages 109-134, June.
    • Handle: RePEc:kap:jeczfn:v:67:y:1998:i:2:p:109-134
    DOI: 10.1007/BF01236065
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    References listed on IDEAS

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    1. Powers, Michael R., 1995. "A theory of risk, return and solvency," Insurance: Mathematics and Economics, Elsevier, vol. 17(2), pages 101-118, October.
    2. Michael Powers & Martin Shubik & Shun Yao, 1998. "Insurance market games: Scale effects and public policy," Journal of Economics, Springer, vol. 67(2), pages 109-134, June.
    3. Sherrill Shaffer, 1989. "Pooling intensifies joint failure risk," Working Papers 89-1, Federal Reserve Bank of Philadelphia.
    4. Baton, Bernard & Lemaire, Jean, 1981. "The Bargaining Set of a Reinsurance Market," ASTIN Bulletin, Cambridge University Press, vol. 12(2), pages 101-114, December.
    5. Baton, Bernard & Lemaire, Jean, 1981. "The Core of a Reinsurance Market," ASTIN Bulletin, Cambridge University Press, vol. 12(1), pages 57-71, June.
    6. Powers, Michael R. & Shubik, Martin, 1998. "On the tradeoff between the law of large numbers and oligopoly in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 23(2), pages 141-156, November.
    7. J. David Cummins & Jack VanDerhei, 1979. "A Note on the Relative Efficiency of Property-Liability Insurance Distribution Systems," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 709-719, Autumn.
    8. Dubey, Pradeep & Shubik, Martin, 1978. "A theory of money and financial institutions. 28. The non-cooperative equilibria of a closed trading economy with market supply and bidding strategies," Journal of Economic Theory, Elsevier, vol. 17(1), pages 1-20, February.
    9. Paul L. Joskow, 1973. "Cartels, Competition and Regulation in the Property-Liability Insurance Industry," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 375-427, Autumn.
    10. Kunreuther, Howard & Pauly, Mark, 1985. "Market equilibrium with private knowledge : An insurance example," Journal of Public Economics, Elsevier, vol. 26(3), pages 269-288, April.
    11. Borch, Karl, 1962. "Application of Game Theory to Some Problems in Automobile Insurance*)," ASTIN Bulletin, Cambridge University Press, vol. 2(2), pages 208-221, September.
    12. Cummins, J. David & Weiss, Mary A., 1993. "Measuring cost efficiency in the property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 463-481, April.
    13. Schlesinger, Harris, 1984. "Two-person insurance negotiation," Insurance: Mathematics and Economics, Elsevier, vol. 3(3), pages 147-149, July.
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    Citations

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    Cited by:

    1. Jeffrey Lange & Nicholas Economides, 2005. "A Parimutuel Market Microstructure for Contingent Claims," European Financial Management, European Financial Management Association, vol. 11(1), pages 25-49, January.
    2. Powers, Michael R. & Shubik, Martin, 1998. "On the tradeoff between the law of large numbers and oligopoly in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 23(2), pages 141-156, November.
    3. Timothy Falcon Crack & Olivier Ledoit, 2010. "Central limit theorems when data are dependent: addressing the pedagogical gaps," IEW - Working Papers 480, Institute for Empirical Research in Economics - University of Zurich.
    4. Jeffrey Lange & Nicholas Economides, 2001. "A Parimutuel Market Microstructure for Contingent Claims Trading," Working Papers 01-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Asmussen, Søren & Christensen, Bent Jesper & Thøgersen, Julie, 2019. "Nash equilibrium premium strategies for push–pull competition in a frictional non-life insurance market," Insurance: Mathematics and Economics, Elsevier, vol. 87(C), pages 92-100.
    6. Michael Powers & Martin Shubik & Shun Yao, 1998. "Insurance market games: Scale effects and public policy," Journal of Economics, Springer, vol. 67(2), pages 109-134, June.
    7. Claire Mouminoux & Christophe Dutang & Stéphane Loisel & Hansjoerg Albrecher, 2022. "On a Markovian Game Model for Competitive Insurance Pricing," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 1061-1091, June.
    8. Powers, Michael R. & Shubik, Martin, 2001. "Toward a theory of reinsurance and retrocession," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 271-290, October.
    9. Boonen, Tim J. & Pantelous, Athanasios A. & Wu, Renchao, 2018. "Non-cooperative dynamic games for general insurance markets," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 123-135.
    10. Søren Asmussen & Bent Jesper Christensen & Julie Thøgersen, 2019. "Stackelberg Equilibrium Premium Strategies for Push-Pull Competition in a Non-Life Insurance Market with Product Differentiation," Risks, MDPI, vol. 7(2), pages 1-23, May.

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    More about this item

    Keywords

    insurance market games; scale effects; public policy; C70; G22;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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