Imperfect Competition in Selection Markets

58 Pages Posted: 25 Aug 2014 Last revised: 14 Apr 2016

See all articles by Neale Mahoney

Neale Mahoney

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

E. Glen Weyl

Microsoft Research New York City; RadicalxChange Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

Standard policies to correct market power and selection can be misguided when these two forces co-exist. Using a calibrated model of employer-sponsored health insurance, we show that the risk adjustment commonly used by employers to offset adverse selection often reduces the amount of high-quality coverage and thus social surplus. Conversely, in a model of subprime auto lending calibrated to Einav, Jenkins and Levin (2012), realistic levels of competition among lenders generate a significant oversupply of credit, implying greater market power is desirable. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection and use graphical price-theoretic reasoning to provide a general analysis of the interaction between selection and imperfect competition. We use the same logic to show that in selection markets four principles of the United States Horizontal Merger Guidelines are often reversed.

Suggested Citation

Mahoney, Neale and Weyl, Eric Glen, Imperfect Competition in Selection Markets (August 2014). NBER Working Paper No. w20411. Available at SSRN: https://ssrn.com/abstract=2486401

Neale Mahoney (Contact Author)

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