COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1076

Insurance Market Games: Scale Effects and Public Policy

Michael R. Powers, Martin Shubik, and Shun Tian Yao

1994

We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model, we present a one-period game in which both the buyers and sellers of insurance make strategic bids, and show that, under reasonably broad conditions, market equilibrium exists. For a special case, we then consider how both the price and quantity of insurance, as well as other quantities of interest to public policy decision makers, are affected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.