Imperfect Competition in Selection Markets
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, L41working papers series
Date posted: December 30, 2013 ; Last revised: April 4, 2014
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