Industrial economics studies in insurance markets

This thesis consists of three essays each studying insurance markets from a different perspective. The first studies competition in the domestic Finnish non-life insurance market using a persistence of profits model, where it is assumed that firms use competitors' past profits as signals of attractiveness of given submarkets. The firms were divided into two strategic groups. The existence of these groups, the effects of two mergers, and the level of competition were tested for. It emerged that the groups compete hard against each other, that fringe firms compete more with the leader group than with each other, that leaders' either follow some kind of tacit collusion strategy or compete very aggressively against each other, and that the mergers lead to a tightening of competition. The second essay is theoretical. The question asked is: does it pay for an insurance firm to acquire information of its customers' type and level of effort. Adverse selection and moral hazard analyses are combined, using geometric tools. Welfare analysis is central in this essay. Decision rules are derived for a monopoly to become vertically integrated. It is shown that in oligopoly it is possible to have an equilibrium where firms use asymmetric vertical strategies. Welfare effects of vertical integration prove to be ambiguous. The model has several other applications, eg. job market, organization of regulatory institutions. In the third essay it is argued that oligopolistic firms do not necessarily minimize costs when maximizing profits, and that this affects cost function specification and estimation. A cost function is constrained so that it can be estimated even though the number of products is large. The proposed specification gives a better fit them traditional specifications, and the quantitative and qualitative results are very different. The costs of branch proliferation are calculated, and the lowest mean for five biggest firms is 37% of total operating costs