Thursday, May 26, 2022

Insurance Monopoly and Imperfect Competition when Insurers Affect Risk

Insurance Monopoly and Imperfect Competition when Insurers Affect Risk

Ronen Avraham Tel Aviv University - Buchmann Faculty of Law; University of Texas at Austin - School of Law

David Gilo Tel Aviv University - Buchmann Faculty of Law

Abstract

We study insurers’ behavior under monopoly and Cournot duopoly when they can affect the probability or magnitude of harm from accidents. The way consumers’ risk aversion changes with wealth and the way risk affects the slope of the demand function determine whether Cournot duopolists increase risk more, or less, than a monopoly insurer or a collusive industry. When consumers’ risk aversion is not too decreasing in wealth, so that the slope of the demand function is steep enough, or when harm is large enough, insurers prefer to use the probability of accidents as a tool to increase market power and raise the probability of accidents to a level exceeding that which maximizes demand. If the increase in the probability of accidents moderately diminishes the slope of the demand function, a duopoly insurer may increase the probability of accidents more than a monopolist, so as to relax competition. If the slope of the demand function is moderate and harm is small, a monopolist raises the probability of accidents to a level below that which maximizes demand, and a duopolist raises this probability less than a monopolist would. Insurers do not raise the risk from accidents when initial risk is negligible and insurers’ ability to raise risk is limited. Joint lobbying increases the risk of accidents advocated for compared to separate lobbying. Joint lobbying could either increase or reduce prices compared to separate lobbying, depending on the slope of the demand function and on how increased risk of accidents affects this slope.

https://lawprofessors.typepad.com/antitrustprof_blog/2022/05/insurance-monopoly-and-imperfect-competition-when-insurers-affect-risk.html

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