Compensation schemes for the monopolistic broker in the insurance market

Abstract

This paper investigates the influences of the broker’s compensation schemes on the equilibrium consequences in the insurance market, when the broker is a monopoly. In a simple model where two insurers are differentiating their products and consumers are distributed on a linear city, we compare two compensation rules, the fee-for-advice system and the commission system. We also consider the broker’s service quality, which is the matching probability of consumer’s and insurer’s type. The existence of the monopolistic broker improves social welfare, but decreases the consumer surplus under both compensation schemes. However, the decrease of consumer surplus is relatively moderate under the fee-for-advice system than under the commission system. Moreover, under a special condition, the social welfare is higher with the fee system than with the commission system.