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

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  • Buzzacchi, Luigi
  • Valletti, Tommaso

Abstract

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.

Suggested Citation

  • Buzzacchi, Luigi & Valletti, Tommaso, 2002. "Firm Size Distribution: Testing the 'Independent Submarkets Model' in the Italian Motor Insurance Industry," CEPR Discussion Papers 3444, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3444
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    References listed on IDEAS

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    1. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
    2. Asplund, Marcus, 1998. "On the size distributions of firms and markets," SSE/EFI Working Paper Series in Economics and Finance 288, Stockholm School of Economics.
    3. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    4. Franco Mariuzzo & Patrick Walsh & Ciara Whelan, 2003. "Firm Size and Market Power in Carbonated Soft Drinks," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 283-299, December.
    5. Barron, John M. & Taylor, Beck A. & Umbeck, John R., 2004. "Number of sellers, average prices, and price dispersion," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1041-1066, November.
    6. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-438, April.
    7. Luigi Buzzacchi & Tommaso M. Valletti, 2004. "Firm Size Distribution in Small Samples," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 301-309, October.
    8. de Juan, Rebeca, 2003. "The independent submarkets model: an application to the Spanish retail banking market," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1461-1487, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Patrick Paul Walsh & Ciara Whelan, 2002. "Portfolio Effects and Firm Size Distribution - Carbonated Soft Drinks," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 43-54.
    2. John Hutchinson & Jozef Konings & Patrick Walsh, 2010. "The Firm Size Distribution and Inter-Industry Diversification," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 37(2), pages 65-82, September.
    3. Scalera Domenico & Zazzaro Alberto, 2007. "The Unpleasant Effects of Price Deregulation in the European Third-Party Motor Insurance Market: A Theoretical Framework," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-30, October.
    4. Franco Mariuzzo & Patrick Walsh & Ciara Whelan, 2003. "Firm Size and Market Power in Carbonated Soft Drinks," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 283-299, December.
    5. Patrick Paul Walsh & Ciara Whelan, 2001. "Product Differentiation and Firm Size Distribution - An Application to Carbonated Soft Drinks," Working Papers 200113, School of Economics, University College Dublin.
    6. Tom Van Ourti & Philip Clarke, 2008. "The Bias of the Gini Coefficient due to Grouping," Tinbergen Institute Discussion Papers 08-095/3, Tinbergen Institute.
    7. Maria Letizia Giorgetti, 2001. "Quantile Regression in Lower Bound Estimation," STICERD - Economics of Industry Papers 29, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    8. Silvana Robone & Alberto Zanardi, 2006. "Market structure and technology: evidence from the Italian National Health Service," International Journal of Health Economics and Management, Springer, vol. 6(3), pages 215-236, September.
    9. GIANNETTI, Caterina, 2007. "Intensity of competition and market structure in the Italian banking industry," LIDAM Discussion Papers CORE 2007041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Luigi Buzzacchi & Tommaso M. Valletti, 2004. "Firm Size Distribution in Small Samples," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 301-309, October.
    11. Ciara Whelan, 2003. "Is equating market share to market power a sound economic principle?," Open Access publications 10197/136, School of Economics, University College Dublin.
    12. repec:lic:licosd:13503 is not listed on IDEAS
    13. Kattuman, P. & Roberts, B.M., 2000. "Strategy Choices of Firms and Market Concentration'," Cambridge Working Papers in Economics 0018, Faculty of Economics, University of Cambridge.
    14. John Sutton, 2001. "Rich Trades, Scarce Capabilities: Industrial Development Revisited," STICERD - Economics of Industry Papers 28, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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    More about this item

    Keywords

    Size distribution of firms; Independent submarkets; Insurance companies; Price dispersion;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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