Intermediary Commissions and price competition in a Regulated Market with Heterogeneous Customers
66 Pages Posted: 5 Feb 2018 Last revised: 4 Jan 2022
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: Suggested Citation