The vertical differentiation model in the insurance market: costs structure and equilibria analysis

Denis V. Kuzyutin^a, Maria V. Nikitina^b, Nadezhda V. Smirnova^b, Ludmila N. Razgulyaeva<sup>b

a</sup> St. Petersburg State University, Bibliotechnaya pl. 2, St. Petersburg, 198504, Russia
^b Higher School of Economics, Kantemirovskaya ul. 3, St. Petersburg, Russia

Abstract: We investigate the vertical differentiation model in the insurance market taking into account fixed costs (the costs of quality improvement) of different structure. The subgame perfect equilibrium in a two-stage game is constructed for the case of compulsory insurance when firms use Bertrand–Nash or Stakelberg equilibria at the stage of price competition. For the case of optional insurance we explore and compare the firms optimal behavior in monopoly and duopoly settings.

Keywords: vertical differentiation model, insurance, equilibrium, quality, duopoly, monopoly pricing, fixed costs.

Language: English