Monday, March 3, 2014
Neale Mahoney, University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)and E. Glen Weyl, University of Chicago; University of Toulouse 1 - Toulouse School of Economics address Imperfect Competition in Selection Markets.
ABSTRACT: Many standard intuitions about the distortions created by market power and selection are reversed when these forces co-exist. Adverse selection may be socially beneficial under monopoly, for example, and market power may be beneficial in the presence of advantageous selection. We develop a simple, but quite general, model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection. We derive basic comparative statics verbally and illustrate them graphically to build intuition. We emphasize the relevance of the most counterintuitive effects with a calibrated model of the insurance market and empirical results from the credit card industry. Among other policy insights, we show that in selection markets four core principles of the United States Horizontal Merger Guidelines are reversed.