DP3444 Firm Size Distribution: Testing the 'Independent Submarkets Model' in the Italian Motor Insurance Industry

Author(s): Luigi Buzzacchi, Tommaso Valletti
Publication Date: July 2002
Keyword(s): independent submarkets, insurance companies, price dispersion, size distribution of firms
JEL(s): D40, G22, L11
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3444

This Paper tests the presence of multiple independent submarkets in the Italian motor insurance industry. Independence is motivated by administrative boundaries among provinces and by further locational reasons. We find that the independence effects are sufficient to induce a minimum degree of inequality in the size distribution of firms once submarkets are aggregated. These results are consistent with the predictions of Sutton (1998). At the submarket level, some degree of inequality can be explained by a model of equilibrium price dispersion based on costly consumer search. Our findings show that Sutton?s limiting approach and one based on a game theoretical analysis of an industry are good complements when the industry is made of several independent submarkets.