Intermediary Commissions in a Regulated Market with Heterogeneous Customers
28 Pages Posted: 5 Feb 2018
Date Written: January 26, 2018
We analyze competition among firms within a regulated industry, where intermediaries’ commissions are paid by customers and set exogenously. Firms set their prices taking into account the impact of commissions over the intermediaries’ advice and consumers’ choices. In this setting, the effect of a change in fees on the equilibrium prices and quantities is nontrivial: Under unbiased advice, the reduction of the commission for one product induces consumers to purchase this product more frequently. Under biased advice, however, intermediaries will recommend this product less often and may reduce the demand for it. The model sheds light on the analysis of the retirement market in Chile, where the annuitization rate decreased after a reform that lowered commissions paid by retirees who choose an annuity.
Keywords: intermediation, biased advice, annuity markets
JEL Classification: L11, L15
Suggested Citation: Suggested Citation