Differentiation in Risk Profiles

Christina Brinkmann ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: This paper offers a model of vertical product differentiation in derivatives markets. Two dealers that choose their risk profile offer insurance to clients who differ in risk aversion. For given risk profiles, a unique price equilibrium exists in which the dealer with the lower risk profile has larger profits. Under plausible conditions, market discipline in the choice of risk profiles emerges: the first mover chooses a low risk profile, and the second mover follows at an optimal distance. The result serves as a reference point when considering the effects of introducing a central counterparty (CCP) that removes the quality dimension of competition.

Keywords: OTC Markets; Derivatives; Central Clearing; Imperfect Competition; Vertical Product Differentiation (search for similar items in EconPapers)
JEL-codes: G12 G23 G28 L13 L15 (search for similar items in EconPapers)
Pages: 66
Date: 2023-07
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_444

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