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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

Three large Indian life insurers dominate a segment of annuity products. Each knows that if it cuts prices, rivals will match immediately and all profits will fall, so prices stay stable and competition shifts to service and brand. A fourth firm considers entering with deep discounts. Which feature of the market does the stable-pricing behaviour best illustrate, and what is the most likely consequence for the entrant?

This is an oligopoly with interdependence among a few large sellers. Because rivals are expected to match any price cut, the entrant's discounting is unlikely to win lasting share, while the incumbents keep prices stable and compete on service and brand. The other market structures do not fit.

  1. APerfect competition; the entrant will gain share through lower prices without any response
  2. BMonopolistic competition; the entrant will face a perfectly elastic demand curve
  3. COligopoly with interdependence; the entrant's price cut is likely to be matched, limiting any share gainCorrect
  4. DNatural monopoly; the entrant will be barred by cost subadditivity alone
  5. Monopsony; the entrant will face a single dominant buyer

Explanation

A few dominant firms whose decisions depend on each other, with sticky prices and non-price competition, is an oligopoly. A rival's price cut would be matched, so the entrant gains little share from discounting alone. Perfect competition and monopsony do not match the facts, and there is no single seller.

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