INSURANCE MARKET GAMES - SCALE EFFECTS AND PUBLIC-POLICY

We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model of insurer solvency (in which all customers have inelastic demand), we present a one-period game in which both the buyers and sellers of insurance mak e strategic bids to determine market price and quantity. For the case in which both buyers and sellers are characterized by constant absolut e risk aversion, we show that a unique market equilibrium exists under certain conditions. For the special case of risk-neutral insurers, we then consider how both the price and quantity of insurance, as well a s other quantities of interest to public-policy decision makers, are a ffected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.