Imperfect Competition in Selection Markets

54 Pages Posted: 30 Dec 2013 Last revised: 12 Jul 2016

Neale Mahoney

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

E. Glen Weyl

Microsoft Research; Yale University

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2016

Abstract

Policies to correct market power and selection can be misguided when these forces co-exist. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of market power and selection. We use graphical price-theoretic reasoning to characterize the interaction between these forces. Using a calibrated model of health insurance, we show that the risk adjustment commonly used to offset adverse selection can reduce the amount of coverage and social surplus. Conversely, in a calibrated model of subprime auto lending, realistic levels of competition can generate an oversupply of credit, implying greater market power is desirable.

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

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

Suggested Citation

Mahoney, Neale and Weyl, E. Glen, Imperfect Competition in Selection Markets (June 8, 2016). Review of Economics and Statistics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2372661 or http://dx.doi.org/10.2139/ssrn.2372661

Neale Mahoney

University of Chicago Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

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Yale University ( email )

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