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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

Several insurers in a market secretly agree to fix premium rates for a class of motor cover. Competition policy generally treats this behaviour as:

This is a cartel. Competitors collude to fix prices, acting like a monopolist, which raises prices and reduces consumer welfare. Competition law generally prohibits such agreements, and it is not a merger, a natural monopoly or price discrimination.

  1. AAcceptable if all insurers are profitable
  2. BA cartel, which is usually prohibited because it restricts competition and raises pricesCorrect
  3. CA natural monopoly, which should be encouraged
  4. DA merger, requiring only notification
  5. Price discrimination, which is always illegal

Explanation

Explicit agreements among rivals to fix prices are cartels. They behave collectively like a monopolist, reduce output and raise prices, so competition law typically prohibits them. Price discrimination and natural monopoly are different concepts.

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