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Differentiation in Risk Profiles

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  • Christina Brinkmann

Abstract

This paper offers a model of vertical product differentiation in derivatives markets. Two dealers that choose their risk profile offer insurance to clients who differ in risk aversion. For given risk profiles, a unique price equilibrium exists in which the dealer with the lower risk profile has larger profits. Under plausible conditions, market discipline in the choice of risk profiles emerges: the first mover chooses a low risk profile, and the second mover follows at an optimal distance. The result serves as a reference point when considering the effects of introducing a central counterparty (CCP) that removes the quality dimension of competition.

Suggested Citation

  • Christina Brinkmann, 2023. "Differentiation in Risk Profiles," CRC TR 224 Discussion Paper Series crctr224_2023_444, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2023_444
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp444
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    References listed on IDEAS

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    More about this item

    Keywords

    OTC Markets; Derivatives; Central Clearing; Imperfect Competition; Vertical Product Differentiation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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