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

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