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Strategic price discrimination in compulsory insurance markets

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Abstract

This paper considers price discrimination when competing firms do not observe a customer's type but only some other variable correlated to it. This is a typical situation in many insurance markets—such as motor insurance— where it is also often the case that insurance is compulsory. We characterise the equilibria and their welfare properties under various price regimes. We show that discrimination based on immutable characteristics such as gender is a dominant strategy, either when firms offer policies at a fixed price or when they charge according to some consumption variable that is correlated to costs. In the latter case, gender discrimination can be an outcome of strategic interaction alone in situations where it would not be adopted by a monopolist. Strategic price discrimination may also increase cross subsidies between types, contrary to expectations

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