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The impact of intermediary remuneration in differentiated insurance markets

  • Hofmann, Annette
  • Nell, Martin
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    This article deals with the impact of intermediaries on insurance market transparency and performance. In a market exhibiting product differentiation and coexistence of perfectly and imperfectly informed consumers, competition among insurers leads to non-existence of a pure-strategy market equilibrium. Consumers may become informed about product suitability by consulting an intermediary. We explicitly model two intermediary remuneration systems: commissions and fees. We find that social welfare under fees is first-best efficient but fees lead to lower expected profits of insurers and non-existence of a pure-strategy market equilibrium. Commissions, in contrast, cause 'overinformation' of consumers relative to minimal social cost, but yield a full-information equilibrium in pure strategies associated with higher expected profits of insurers. This might explain why intermediaries are generally compensated by insurers.

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    File URL: http://econstor.eu/bitstream/10419/54216/1/680540229.pdf
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    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 22.

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    Date of creation: 2008
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    Handle: RePEc:zbw:hzvwps:22
    Contact details of provider: Web page: http://www.hzv-uhh.de/
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    1. Martin J Osborne & Carolyn Pitchik, 1985. "Equilibrium in Hotelling's Model of Spatial Competition," Department of Economics Working Papers 1985-02, McMaster University.
    2. Schultz, Christian, 2004. "Market transparency and product differentiation," Economics Letters, Elsevier, vol. 83(2), pages 173-178, May.
    3. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
    4. Mattias K. Polborn, 1998. "A Model of an Oligopoly in an Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 23(1), pages 41-48, June.
    5. Posey, Lisa L. & Tennyson, Sharon, 1998. "The coexistence of distribution systems under price search: Theory and some evidence from insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 35(1), pages 95-115, March.
    6. Hugh Gravelle, 1993. "Product Price and Advice Quality: Implications of the Commission System in Life Assurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(1), pages 31-53, June.
    7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    8. Sass, Tim R & Gisser, Micha, 1989. "Agency Cost, Firm Size, and Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 381-400, October.
    9. H S E Gravelle, 1991. "The Welfare Economics of Controls on Brokers' Commissions*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 16(1), pages 3-19, January.
    10. Polo, Michele, 1991. "Hotelling Duopoly with Uninformed Consumers," Journal of Industrial Economics, Wiley Blackwell, vol. 39(6), pages 701-15, December.
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