Working Paper: CEPR ID: DP3444
Authors: Luigi Buzzacchi; Tommaso Valletti
Abstract: This Paper tests the presence of multiple independent submarkets in the Italian motor insurance industry. Independence is motivated by administrative boundaries among provinces and by further locational reasons. We find that the independence effects are sufficient to induce a minimum degree of inequality in the size distribution of firms once submarkets are aggregated. These results are consistent with the predictions of Sutton (1998). At the submarket level, some degree of inequality can be explained by a model of equilibrium price dispersion based on costly consumer search. Our findings show that Sutton?s limiting approach and one based on a game theoretical analysis of an industry are good complements when the industry is made of several independent submarkets.
Keywords: Independent Submarkets; Insurance Companies; Price Dispersion; Size Distribution of Firms
JEL Codes: D40; G22; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Number of submarkets (D49) | strategic effects become less important than independence effects (F12) |
| Independent submarkets (D49) | minimum degree of inequality in size distribution of firms (L25) |
| Population size in provinces (C80) | degree of inequality in firm size distribution (D39) |
| Population density and commuter flows (R23) | degree of firm size inequality (L25) |