Price Discrimination in Markets for Lemons

61 Pages Posted: 24 Mar 2020 Last revised: 2 Mar 2022

Date Written: March 1, 2022

Abstract

Should insurance prices vary with age? I consider competitive markets for lemons where a signal (eg, age) partitions consumers (eg, young and old). I study the continuum of policies from zero price-discrimination (zero-PD, equal prices) and full-PD (no restrictions). Restricting PD increases welfare if high-cost markets exhibit greater adverse selection. I characterize optimal PD, and show how it is affected by changes in cost. Full-PD is preferable if one market unravels. In a calibration, optimal PD increases welfare by about $30/person-year. I extend the model to arbitrary signal structures, behavioral consumers, a monopolized industry, and multi-product firms.

Keywords: Adverse Selection, Price Discrimination

JEL Classification: D82, L52,D41

Suggested Citation

Veiga, Andre, Price Discrimination in Markets for Lemons (March 1, 2022). Available at SSRN: https://ssrn.com/abstract=3545479 or http://dx.doi.org/10.2139/ssrn.3545479

Andre Veiga (Contact Author)

Imperial College London ( email )

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

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