Imperfect Competition in Selection Markets

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

E. Glen Weyl

Microsoft Research New England; University of Chicago

April 3, 2014

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 model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection. We derive basic comparative statics and illustrate them graphically to build intuition. We emphasize the relevance of the most counterintuitive effects with a calibrated model of the insurance market. We also apply our results to competition policy and show that in selection markets four core principles of the United States Horizontal Merger Guidelines are often reversed.

Number of Pages in PDF File: 47

Keywords: selection market, imperfect competition, mergers, risk adjustment, risk-based pricing

JEL Classification: D42, D43, D82, I13, L10, L41

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Date posted: December 30, 2013 ; Last revised: April 4, 2014

Suggested Citation

Mahoney, Neale and Weyl, E. Glen, Imperfect Competition in Selection Markets (April 3, 2014). Available at SSRN: http://ssrn.com/abstract=2372661 or http://dx.doi.org/10.2139/ssrn.2372661

Contact Information

Neale Mahoney
University of Chicago Booth School of Business ( email )
5807 South Woodlawn Ave
Chicago, IL 60637
United States
773.702.9278 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
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Eric Glen Weyl (Contact Author)
Microsoft Research New England ( email )
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Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
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Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
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