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Equilibrium Price Dispersion in the Insurance Market
Author(s) -
Hun Seog S.
Publication year - 2002
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/1539-6975.00036
Subject(s) - price dispersion , economics , microeconomics , limit price , monopoly , mid price , production (economics) , dispersion (optics) , factor price , competition (biology) , price level , monetary economics , ecology , physics , optics , biology
We consider price dispersion under nonsequential consumer search when a finite number of firms exists. We assume that firms have the same production technology. We find that single‐price equilibrium exists only when it is the highest possible price (monopoly price). Price dispersion is possible in equilibrium only when firms use mixed strategies. We also find that increased competition may increase price dispersion and the intensity of consumer search while reducing the expected profits of firms. The number of firms in the long run is increasing regarding expected market demand and decreasing regarding production cost and entry cost. We reinterpret some empirical observations reported in the literature.