Insurance Monopoly and Imperfect Competition when Insurers Affect Risk

We study insurers’ behavior under monopoly and Cournot duopoly when they canaffect the probability or magnitude of harm from accidents. The way consumers’risk aversion changes with wealth and the way risk affects the slope of the demandfunction determine whether Cournot duopolists increase risk more, or less, thana monopoly insurer or a collusive industry. When consumers’ risk aversion is nottoo decreasing in wealth, so that the slope of the demand function is steep enough,or when harm is large enough, insurers prefer to use the probability of accidentsas a tool to increase market power and raise the probability of accidents to alevel exceeding that which maximizes demand. If the increase in the probabilityof accidents moderately diminishes the slope of the demand function, a duopolyinsurer may increase the probability of accidents more than a monopolist, so as torelax competition. If the slope of the demand function is moderate and harm issmall, a monopolist raises the probability of accidents to a level below that whichmaximizes demand, and a duopolist raises this probability less than a monopolistwould. Insurers do not raise the risk from accidents when initial risk is negligibleand insurers’ ability to raise risk is limited. Joint lobbying increases the risk ofaccidents advocated for compared to separate lobbying. Joint lobbying could either increase or reduce prices compared to separate lobbying, depending on the slope ofthe demand function and on how increased risk of accidents affects this slope