Life Insurance, Price Regulation and the Theory of Contestable Markets

Barbara Beliveau

Journal of Insurance Issues, 1985, vol. 8, issue 1, 1-12

Abstract: The "perfectly contestable" market has been proposed as the appropriate generalization of the economic concept of a perfectly competitive market for industries characterized by joint production as well as appreciable economies of scale or scope. In a contestable market, industry structure and market behavior are derived from underlying cost efficiencies. Entry (actual or potential) insures productive efficiency and welfare maximization. … The assumptions underlying the theory of contestable markets and their applicability to the U.S. life insurance industry are discussed. The hypothesis that the market for life insurance functions "as if contestable" is then tested. The empirical results are consistent with this hypothesis for a substantial segment of the industry. The policy implications of this finding for insurance premium-regulation are then explored.

Date: 1985
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