Firm Size Distribution: Testing the 'Independent Submarkets Model' in the Italian Motor Insurance Industry

STICERD, London School of Economics Discussion Paper Series, EI/24

36 Pages Posted: 5 Sep 2000

See all articles by Tommaso M. Valletti

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Luigi Buzzacchi

Polytechnic University of Turin

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

Abstract

This paper tests the presence of multiple independent submarkets in the Italian motor insurance industry. Independence is motivated by administrative boundaries among provinces and by further locational reasons. We find that the independence effects are sufficient to induce a minimum degree of inequality in the size distribution of firms once submarkets are aggregated. These results are fully consistent with the predictions of Sutton (1998). At the submarket level, some degree of inequality can be explained by a model of equilibrium price dispersion based on costly consumer search. However, strategic effects alone cannot explain the observed level of inequality in each province, supporting the hypothesis that independence effects are already at work within each province. We also show that the degree of inequality in the firm size distribution is mainly related to the population living in an area, to its density and to the flow of commuters.

Keywords: Size distribution of firms, Independent submarkets, Insurance companies, Price dispersion

JEL Classification: D40, L11, G22

Suggested Citation

Valletti, Tommaso M. and Buzzacchi, Luigi, Firm Size Distribution: Testing the 'Independent Submarkets Model' in the Italian Motor Insurance Industry (July 2000). STICERD, London School of Economics Discussion Paper Series, EI/24. Available at SSRN: https://ssrn.com/abstract=237422 or http://dx.doi.org/10.2139/ssrn.237422

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luigi Buzzacchi

Polytechnic University of Turin ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy

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