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- Title
QUANTITY COMPETITION IN SPATIAL MARKETS WITH INCOMPLETE INFORMATION.
- Authors
Clapp, John M.
- Abstract
This article provides information on a model that demonstrates that insurance companies are able to use the quantity of insurance to compete for customers. Spatial monopolistic firms compete at the boundaries of their market areas for customers who are indifferent as to where they make a purchase. Spatial relationships motivate the incomplete information assumption: high-risk types can conceal their identities because of the spatial separation between firms and customers. The spatial assumptions capture the fact that insurance is marketed through agencies that are situated close to customers. One form of life and health insurance, debit insurance, is marketed and serviced by assigning an exclusive territory to each agency. In the property-casualty market, firms routinely find locations for agencies with information on household characteristics by town, zip code, and Census tract. Loss experience is used to vary premium rates by geographical area. Spatial models require scale economies because no customer would willingly incur transportation costs for a product that could be produced at constant or decreasing returns to scale. The very existence of durable capital argues for the presence of scale economies. Evidence for scale economies in the life insurance industry is provided by the existence of large agencies. Therefore, a standard spatial nonconvexity assumption, the presence of immobile fixed costs can be applied to the insurance industry.
- Subjects
INSURANCE companies; CONSUMERS; SPATIAL analysis (Statistics); HEALTH insurance; INDUSTRIAL life insurance; OVERHEAD costs
- Publication
Quarterly Journal of Economics, 1985, Vol 100, Issue 2, p519
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/1885394