These two variables are sufficiently large as to prevent any form of price equalization.
Stiglitz (1977) noted that the conventional theory of monopoly has in a way been restrictive in an unnecessary manner in regard to two main aspects. The first aspect is that the monopolists will generally tend to charge their clients amounts that are proportional to the quantity that they consume (This is referred to by Stiglitz (1977) as the liner price schedule).Such a policy is noted by Stiglitz (1977) to never lead to profit maximization. The non-liner price schedules are noted to be desirable when feasible. Monopolists are however noted to introduce various forms of inefficiencies due to factors such as secondary resale markets or sue to the fact that individuals differ. These are noted as the discriminating aspects of monopolists in the insurance sector. The second aspects of the conventional theory of monopoly in regard to the insurance industry is that it assumes that all of the firms have a much more constricted and limited ability to effectively differentiate as well as discriminate among its clients, a proposition which is true in actual practice. Location is noted as a basis of differentiation. The quantity consumed is also used a basis of differentiation and hence screening. This is because the quantity that is consumed is usually correlated with the level of consumer surplus. All these are examples of screening devices. A screening device is defined by Stiglitz (1977,p.408) as any mechanism which is employed by firms to differentiate among its clients. Screening devices are therefore a basis of differentiation that is used a selection mechanism on the basis of an individual's actions such as their choice of insurance policy.
Empirical underpinnings
The work is based on a series of empirical formula....
The one that is used is the general formulation of monopoly-price discrimination.
The general formulation states that;
Considering a firm that has a form of monopoly over a set of selected commodities. There is a cost which is associated with the production of a total quantity of the goods; Xl, .., Xm, which is given by equation C (X1, ..., X.). The jth cuxtomer has a utility function that is defined over his or her consumption of m commodities denoted by (xi,. xi) = xi, as well as hi or her expenditure on other sets of goods, which shall be denote by x. The Different customers therefore differ in a systematic and yet continuous manner (such as in the level of income); therefore, we formulate the utility of an customerof type 0 as:
ui = Ui (X, ..., xi; 0).
Summary of results
The paper has tried to prove that the scope of partial discrimination by monopolists among their clients is much greater than previously suspected. Their attempt to discriminate among their clients leads them to engage in certain practices that kind of restrict the set of insurance contracts that they avail to their clients by the application of non-liner price schedules, random prices as well as bundling as tie-in sales.
Main limitations and possible lines of further research
The main limitation for this research is that it never differentiated between public and private insurance companies. Future research should make this distinction.
References
Abraham, M (2008)Importance of a Theoretical Framework for Research. ACS Symposium Series, Vol. 976. DOI: 10.1021/bk-2008-0976.ch005
Stiglitz, J.E. (1977), A "Monopoly, Non-Linear Pricing and Imperfect Information: The Insurance Market, A" Review of Economic Studies, 44, 407-430.
