On the Use of Information in Oligopolistic Insurance Markets

Authors

  • Iris Kesternich,

    Search for more papers by this author
    • Iris Kesternich is with Ludwig-Maximilians University Munich, Germany. Heiner Schumacher is with Goethe-University Frankfurt, Germany. The authors can be contacted via e-mail: iris.kesternich@lrz.uni-muenchen.de and heiner.schumacher@econ.uni-frankfurt.de, respectively. We thank Amy Finkelstein, Guido Friebel, Michael Hoy, Matthias Polborn, Monika Schnitzer, Ray Rees, Andreas Richter, Achim Wambach, and Joachim Winter for helpful comments; Anna Gumpert and Sebastian Kohls for excellent research assistance; and Georges Dionne (the editor) and two anonymous referees for superb advice. Financial support through SFB-TR15 is gratefully acknowledged.
  • Heiner Schumacher

    Search for more papers by this author
    • Iris Kesternich is with Ludwig-Maximilians University Munich, Germany. Heiner Schumacher is with Goethe-University Frankfurt, Germany. The authors can be contacted via e-mail: iris.kesternich@lrz.uni-muenchen.de and heiner.schumacher@econ.uni-frankfurt.de, respectively. We thank Amy Finkelstein, Guido Friebel, Michael Hoy, Matthias Polborn, Monika Schnitzer, Ray Rees, Andreas Richter, Achim Wambach, and Joachim Winter for helpful comments; Anna Gumpert and Sebastian Kohls for excellent research assistance; and Georges Dionne (the editor) and two anonymous referees for superb advice. Financial support through SFB-TR15 is gratefully acknowledged.

Abstract

We analyze the use of information in an oligopolistic insurance market with costly market entry. For intermediate values of entry costs, an equilibrium exists that is profit maximizing for incumbents and in which companies do not discriminate between high and low risks. The model therefore provides an explanation for the existence of “unused observables,” that is, information that (1) insurance companies collect or could collect, (2) is correlated with risk, but (3) is not used to set premiums.

Ancillary