Strategic Price Discrimination in Compulsory Insurance Markets

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 insurancewhere 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.

Strategic Adverse Selection: Raising Competitor Costs in the Insurance Industry

“…Buzzacchi and Valletti (2005) present model where categorization is a choice variable. Matching a competitor's categorization is shown to be a dominant strategy for …rms and the equilibrium predicts symmetry in categorization strategies.…”

“…While e¤orts to utilize segmentation strategies are common in some insurance markets, they have never been satisfactorily modeled, nor have markets, where categorization is unfettered, been tested for their presence. When considered at all, segmentation strategies have been modeled in a relatively ad hoc fashion (Buzzacchi and Valletti (2005), Schwarze and Wein (2005), and Strauss and Hollis (2007)). This paper clari…es how segmentation strategies di¤er from simple increases in pricing precision, details implications of their use, and provides evidence of their e¤ective utilization.…”

Economic Effects of Risk Classification Bans

“…24 For example, Stiglitz (1977) and Chade and Schlee (2012). 25 For example, Buzzacchi and Valletti (2005). 26 For example, Pauly (1974), Hoy and Polborn (2000), Villeneuve (2003), and Rothschild (2014).…”

Economic Effects of Risk Classification Bans

“…11 Of course, the social planner could always choose to offer a single contract to all individuals, in which case constraint (5) would have no "bite." Schlee, 2012) or oligopolistic markets (e.g., Buzzacchi and Valletti, 2005). Nor do we consider linear pricing equilibrium, which are often used in markets where contracting is non-exclusive and individuals can buy small amounts of coverage from multiple providers simultaneously (e.g., Pauly, 1974, Hoy and Polbgorn, 2000, Villeneuve, 2003, and Rothschild, 2014.…”