Price Dispersion in an Automobile Insurance Market

Dahlby, Bev; West, Douglas S.

doi:10.1086/261380

Cited by 187 publications

(119 citation statements)

References 12 publications

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“…Unfortunately, real-world markets rarely operate so smoothly. In fact, the existence of price dispersion is one of economics' most replicated findings (see Pratt et al 1979, Dahlby and West 1986, or Sorensen 2000.…”

Section: Brynjolfsson and Smith A Comparison Of Internet And Conventimentioning

confidence: 99%

“…As noted above, Bakos (1997) analyzes the role of electronically mediated markets in lowering search costs, and finds that lower search costs should lead to lower and more homogeneous prices. Empirically, search costs have been found to explain price dispersion in auto insurance markets (Dahlby and West 1986) and, more recently, in prescription drug markets (Sorensen 2000). Salop andStiglitz (1977, 1982) and Varian (1980) have analyzed price dispersion arising from consumers who are differentially informed of prices.…”

Section: Brynjolfsson and Smith A Comparison Of Internet And Conventimentioning

confidence: 99%

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Frictionless Commerce? A Comparison of Internet and Conventional Retailers

Brynjolfsson¹,

Smith²

2000

Management Science

1,960

1,227

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T here have been many claims that the Internet represents a new nearly "frictionless market." Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets.We find that prices on the Internet are 9 -16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, we find that Internet retailers' price adjustments over time are up to 100 times smaller than conventional retailers' price adjustments-presumably reflecting lower menu costs in Internet channels. We also find that levels of price dispersion depend importantly on the measures employed. When we compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when we weight these prices by proxies for market share, we find dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers.We conclude that while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.

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Section: Brynjolfsson and Smith A Comparison Of Internet And Conventimentioning

confidence: 99%

Section: Brynjolfsson and Smith A Comparison Of Internet And Conventimentioning

confidence: 99%

Frictionless Commerce? A Comparison of Internet and Conventional Retailers

Brynjolfsson¹,

Smith²

2000

Management Science

1,960

1,227

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“…The importance of search costs in insurance markets has been empirically documented (Dahlby and West, 1986). Profitability patterns by insurance policy cohort also suggest that insurers gain information about the risk characteristics of policy-holders over time (D'Arcy and Doherty, 1990); this information asymmetry could effectively lock consumers into purchasing from a particular insurer.…”

Section: Explaining Automobile Insurance Price Increases Insurer Behamentioning

confidence: 99%

Controlling Automobile Insurance Costs

Cummins

Tennyson

1992

Journal of Economic Perspectives

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A utomobile insurance prices rose rapidly throughout the 1980s, even as the general rate of inflation slowed and automobile accident rates declined. The auto insurance component of the consumer price index more than doubled over the decade, increasing at a rate almost twice as fast as the overall CPI, and faster than even medical care inflation. The discrepancy was even greater from [1984][1985][1986][1987][1988][1989], when the auto insurance CPI grew at 9 percent per year and the all-items CPI at only 3.5 percent; by contrast, the medical component of the CPI grew only 6.5 percent annually over this time period. Some states have been hit harder than others, and double-digit inflation rates are not uncommon. In 1989 the average premium per car ranged from $353 in Iowa to $1074 in New Jersey (National Association of Insurance Commissioners, 1990). Premiums for high risk groups such as young males can be several hundred percent higher than the average. These trends have made auto insurance harder to afford for many consumers, particularly in urban areas, and the number of uninsured motorists has grown. As a result, auto insurance has become a potent political issue. It has figured prominently in gubernatorial races from New Jersey to California, and has stimulated many legislative and consumer initiatives aimed at reducing premiums.The populist view is that high insurance costs are primarily attributable to inefficient and excessively profitable insurance companies. Insurers are accused of paying claims without adequate controls, padding their expenses, and passing the costs along to the consumer, all while being shielded by a federal antitrust exemption. Insurers counter that insurance markets are competitive

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“…Further theoretical work has been devoted to refine Stigler's predictions and to provide formal conditions under which price dispersion may be an equilibrium solution in non-differentiated product markets [Rothschild (1973); Rosenthal (1980) 2. Existing evidence in support of search costs, as an explanation for observed price dispersion, comes from papers that link price dispersion to product-specific inflation [Stigler and Kindhal (1970); Van Hoomissen (1988); Reinsdorf (1994)], to differences in search costs and search activity across markets [Pratt, Wise and Zeckhauser (1979); Dahlby and West (1986); Hayes and Ross (1998); Brown and Goolsbee (2002); Barron, Taylor and Umbeck (2004)], and to the frequency of repeated purchases of products [Sorensen (2000)]. Other papers that provide evidence consistent with search costs are Hortacçu and Syverson (2004) and Hong and Shum (2006).…”

Section: Introductionmentioning

confidence: 99%