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Collusion in a One-Period Insurance Market with Adverse Selection

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We show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model --this shows that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints-- and we assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they had reduced the coverage offered to their customers and as a result significantly raised their profits. Our model is consistent with this accusation

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv196.

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Length: 17 pages
Date of creation: Dec 2007
Handle: RePEc:ila:ilades:inv196
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  1. Cummins, J. David & Rubio-Misas, Maria, 2006. "Deregulation, Consolidation, and Efficiency: Evidence from the Spanish Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 323-355, March.
  2. Claudio Agostini & Eduardo Saavedra & Manuel Willington, 2010. "Collusion Among Health Insurers in Chile: Good, Bad, and Ugly Reasons in a Split Decision," Antitrust Chronicle, Competition Policy International, vol. 7.
  3. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, July.
  4. Peski, Marcin, 2010. "Generalized risk-dominance and asymmetric dynamics," Journal of Economic Theory, Elsevier, vol. 145(1), pages 216-248, January.
  5. William C. Hsiao & R. Paul Shaw, 2007. "Social Health Insurance for Developing Nations," World Bank Publications, The World Bank, number 6860, August.
  6. Edmundo Beteta & Manuel Willington, 2009. "Planes Mínimos Obligatorios en Mercados de Seguros de Salud Segmentados," Estudios de Economia, University of Chile, Department of Economics, vol. 36(2 Year 20), pages 217-241, December.
  7. Given, Ruth S., 1996. "Economies of scale and scope as an explanation of merger and output diversification activities in the health maintenance organization industry," Journal of Health Economics, Elsevier, vol. 15(6), pages 685-713, December.
  8. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
  9. Yin Choo Yap, 2009. "The Effects of Economies of Scale and Diversification on the Cost Structure of the Malaysian Non-life Insurance Industry," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 4(1), pages 1-29, November.
  10. Arthur Snow, 2009. "On the Possibility of Profitable Self-Selection Contracts in Competitive Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 249-259.
  11. Inderst, Roman & Wambach, Achim, 2001. "Competitive insurance markets under adverse selection and capacity constraints," European Economic Review, Elsevier, vol. 45(10), pages 1981-1992, December.
  12. Hellwig, Martin F., 1988. "A note on the specification of interfirm communication in insurance markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 46(1), pages 154-163, October.
  13. Ronald D. Fischer & Pablo Serra, 1997. "Análisis económico del sistema de seguros de salud en Chile," Documentos de Trabajo 17, Centro de Economía Aplicada, Universidad de Chile.
  14. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
  15. Smart, Michael, 2000. "Competitive Insurance Markets with Two Unobservables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 153-169, February.
  16. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 27-41.
  17. Asheim, Geir B. & Nilssen, Tore, 1996. "Non-discriminating renegotiation in a competitive insurance market," European Economic Review, Elsevier, vol. 40(9), pages 1717-1736, December.
  18. Lloyd-Sherlock, Peter, 2005. "Health sector reform in Argentina: a cautionary tale," Social Science & Medicine, Elsevier, vol. 60(8), pages 1893-1903, April.
  19. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 407-430.
  20. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
  21. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
  22. Wholey, Douglas & Feldman, Roger & Christianson, Jon B. & Engberg, John, 1996. "Scale and scope economies among health maintenance organizations," Journal of Health Economics, Elsevier, vol. 15(6), pages 657-684, December.
  23. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
  24. Krishnendu Dastidar, 2001. "Collusive outcomes in price competition," Journal of Economics, Springer, vol. 73(1), pages 81-93, February.
  25. Hanweck, Gerald A. & Hogan, Arthur M. B., 1996. "The structure of the property/casualty insurance industry," Journal of Economics and Business, Elsevier, vol. 48(2), pages 141-155, May.
  26. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
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