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Dynamic Price Competition in Auto-Insurance Brokerage

Bruno Aurichio and Luis Braido ()

No 17, Fucape Working Papers from Fucape Business School

Abstract: Brazilian data on auto-insurance present an intriguing fact: the coexistence of policies being sold with zero and positive brokerage fees. We extend the Bertrand model of price competition to a dynamic environment in which agents face a .xed cost to switch to a new (unmatched) broker. This incumbent?s advantage drives unmatched brokers to set fees aggressively. We explicitly derive symmetric re-cursive Nash equilibrium in which zero and positive brokerage fees are played with positive probability. We then use the mixed-strategy equilibrium distribution to perform a maximum likelihood estimation of the model parameters. Using data on brokerage fees alone, this structural econometric procedure allows us to identify: (i) the number of brokers effectively bidding to a given consumer; (ii) the insuree?s cost of switching brokers; and (iii) the expected life-time discounted profits of matched and unmatched brokers.

Keywords: Brokerage; fees; price competition; structural estimation; auto-insurance. (search for similar items in EconPapers)
Pages: 34
Date: 2009-12
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Published in Fucape Working Papers Dezembro 2009

Downloads: (external link) Primeira Versão, 2009 (application/pdf)
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Journal Article: Dynamic price competition in auto insurance brokerage (2018) Downloads
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