Equilibrium Price Dispersion in the Insurance Market, Journal of Risk and Insurance, 69 (4), 2002: 517-536

Abstract

We consider price dispersion under nonsequential consumer search when a finite number of firms exists. We assume that firms have the same production technology. We find that single-price equilibrium exists only when it is the highest possible price (monopoly price). Price dispersion is possible in equilibrium only when firms use mixed strategies. We also find that increased competition may increase price dispersion and the intensity of consumer search while reducing the expected profits of firms. The number of firms in the long run is increasing regarding expected market demand and decreasing regarding production cost and entry cost. We reinterpret some empirical observations reported in the literature.