Dynamic Price Competition in Auto-Insurance Brokerage
Luis H.B. Braidoz
November 25, 2009
Brazilian data on auto-insurance present an intriguing fact: the coexistence of
policies being sold with zero and positive brokerage fees. We extend the Bertrand
model of price competition to a dynamic environment in which agents face a
cost to switch to a new (unmatched) broker. This incumbents advantage drives
unmatched brokers to set fees aggressively. We explicitly derive a symmetric re-
cursive Nash equilibrium in which zero and positive brokerage fees are played with
positive probability. We then use the mixed-strategy equilibrium distribution to
perform a maximum likelihood estimation of the model parameters. Using data on
brokerage fees alone, this structural econometric procedure allows us to identify:
(i) the number of brokers e¤ectively bidding to a given consumer; (ii) the insurees
cost of switching brokers; and (iii) the expected life-time discounted pro
matched and unmatched brokers.
Keywords: Brokerage, fees, price competition, structural estimation, auto-insurance.
cation: D4; L1.
We are thankful for comments from Marcelo Medeiros, Humberto Moreira, Heleno Pioner, Marcelo
SantAnna, and seminar participants at IPEA, PUC-Rio, and USP.
yFUCAPE Business School and Getulio Vargas Foundation (FGV-EPGE); email@example.com.
zGetulio Vargas Foundation, Graduate School of Economics (FGV-EPGE); Praia de Botafogo 190,
s.1100, Rio de Janeiro, RJ 22253-900, Brazil; firstname.lastname@example.org.
Brokers intermediate sales in many di¤erent markets such as real state and insur-
ance. In the automobile insurance market, for instance, they act as retailers for the
insurance companies and help consumers to
ll out reimbursement papers in the case
of a claim. This sector is very competitive in Brazil. Thousands of independent bro-
kers o¤er policies from di¤erent insurance companies and add a brokerage fee to the
insurance wholesale price.
In this paper, we analyze Brazilian