Intermediary Commissions and price competition in a Regulated Market with Heterogeneous Customers

66 Pages Posted: 5 Feb 2018 Last revised: 4 Jan 2022

See all articles by Pilar Alcalde

Pilar Alcalde

Universidad de los Andes, Chile

Bernardita Vial

Pontificia Universidad Católica de Chile

Date Written: July 2021

Abstract

Besides its effect on customers’ choices, trust in the intermediaries’ expertise also affects firms’ market power and equilibrium prices. Customers who base their decisions on intermediaries’ recommendations are less sensitive to price changes. Our model shows that prices may move in the opposite direction to the intermediaries’ bias. When intermediaries are cheaper and less biased, more customers follow their advice, making demand less elastic. This change induces firms to increase prices, producing nontrivial effects on welfare. Evidence from a policy reform in Chile’s retirement market is broadly
consistent with these predictions and suggests that demands respond to commission changes.

Keywords: intermediation, biased advice, annuity markets

JEL Classification: L11, L15

Suggested Citation

Alcalde, Pilar and Vial, Bernardita, Intermediary Commissions and price competition in a Regulated Market with Heterogeneous Customers (July 2021). Available at SSRN: https://ssrn.com/abstract=3110897 or http://dx.doi.org/10.2139/ssrn.3110897

Pilar Alcalde (Contact Author)

Universidad de los Andes, Chile ( email )

Monsenor Alvaro del Portillo 12.455, Las Condes
Santiago
Chile
+562 26181626 (Phone)

HOME PAGE: http://sites.google.com/site/palcaldee

Bernardita Vial

Pontificia Universidad Católica de Chile ( email )

Av. Vicuña Mackenna 4860
Macul
Santiago
Chile

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