If incumbent insurers lower the price in order toward attract a large amount of consumers in advance, potential entrants may be discouraged starting entering the insurance market because the residual demand would be very small. Thus incumbent insurers would have toward choose between the following strategies.-
Strategy [1].- After the incumbent insurers set a low price toward deter new entry, they raise the price using their monopoly power.
Strategy [2].-After the incumbent insurers set a high price, they compete through new insurers.
Strategy [2] can generate higher profits before new entry, while strategy [1] can generate higher profits later. Therefore, which strategy is more profitable is unclear Moreover, whichever strategy is preferred; it is not understandable why an incumbent insurer chooses this particular strategy.
The main result of this research is very simple. Toward be specific, the lower the entry fixed costs and/or the lower the degree of product differentiation, the more likely is new entry.
Some insurers sell insurance products which have an interesting characteristic. These products raise their dividend or discount their insurance premium in proportion toward the length of the time of insurance, Takahashi, Nihon-keizai Newspaper, and Asahi Newspaper. Thus, consumers which bought these products will not wish toward modify their insurer, at least in the short term. In other words, insurers’ container retains many consumers through these products. If incumbent insurers attracted a large amount of consumers in advance, potential entrants may be discouraged starting entering the insurance market because the residual demand would be very small. Furthermore, if this improvement were toward be expected by the incumbent insurers, they would have toward choose between the following strategies:
Strategy [I]: After the incumbent insurers set a low price toward deter new entry, they raise the price using their monopoly power. Strategy [2]: After the incumbent insurers set a high price, they compete through new insurers.
Strategy [2] can generate higher profits before new entry, while strategy [1] can generate higher profits later. Therefore, which strategy is more profitable is unclear. Moreover, whichever strategy is chosen, it is not clear why an incumbent insurer chooses this particular strategy.
Many researchers have already addressed such problems. The model in this paper draws on the model of Spence, but does not contain capacity constraints In the following sections, we present a very simple form which addresses these problems, especially the strategies chosen by incumbent insurers.
