On the Existence of Positive Equilibrium Profits in Competitive Screening Markets

60 Pages Posted: 24 Mar 2020

See all articles by Andre Veiga

Andre Veiga

Imperial College London

Yehuda Levy

Nuffield College and Department of Economics, University of Oxford

Date Written: February 27, 2020

Abstract

We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimising bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We pro- vide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).

Keywords: Perfect Competition, Equilibrium, Screening

JEL Classification: D41, C62, D82, G22

Suggested Citation

Veiga, Andre and Levy, Yehuda, On the Existence of Positive Equilibrium Profits in Competitive Screening Markets (February 27, 2020). Available at SSRN: https://ssrn.com/abstract=3545488 or http://dx.doi.org/10.2139/ssrn.3545488

Andre Veiga (Contact Author)

Imperial College London ( email )

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

Yehuda Levy

Nuffield College and Department of Economics, University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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