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

November 14, 2014

Standard policies to correct market power and selection can be misguided when these two forces co-exist. Using a calibrated model of employer-sponsored health insurance, we show that the risk adjustment commonly used by employers to offset adverse selection often reduces the amount of high-quality coverage and thus social surplus. Conversely, in a model of subprime auto lending calibrated to Einav, Jenkins and Levin (2012), realistic levels of competition among lenders generate a significant oversupply of credit, implying greater market power is desirable. These results motivate a general model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection. We use graphical price-theoretic reasoning to comprehensively characterize the interaction between selection and imperfect competition. Our results imply that in selection markets four principles of the United States Horizontal Merger Guidelines are often reversed.

Number of Pages in PDF File: 58

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

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

Open PDF in Browser Download This Paper

Date posted: December 30, 2013 ; Last revised: November 15, 2014

Suggested Citation

Mahoney, Neale and Weyl, E. Glen, Imperfect Competition in Selection Markets (November 14, 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
United States
Eric Glen Weyl (Contact Author)
Microsoft Research New England ( email )
One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
1126 East 59th Street
Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
Feedback to SSRN

Paper statistics
Abstract Views: 2,953
Downloads: 791
Download Rank: 20,762

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.203 seconds