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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

Two Indian life insurers each choose a 'high' or 'low' premium rate on a similar term plan. If both choose high, each earns ₹50 crore; if both choose low, each earns ₹30 crore; if one chooses low and the other high, the low-price firm earns ₹60 crore and the high-price firm earns ₹10 crore. Which statement describes the one-shot game?

Low pricing is a dominant strategy for both insurers, since it pays more whatever the rival does. The Nash equilibrium is both choosing low with ₹30 crore each, even though both high would give ₹50 crore each.

  1. ALow is a dominant strategy for each, giving a Nash equilibrium of both lowCorrect
  2. BHigh is a dominant strategy for each, giving both high
  3. CThere is no Nash equilibrium
  4. DBoth high is the Nash equilibrium because it maximises joint profit
  5. Only one firm has a dominant strategy

Explanation

If the rival chooses high, low earns 60 against 50 for high. If the rival chooses low, low earns 30 against 10 for high. So low is dominant for both, and the equilibrium is both low at ₹30 crore each. Both high is better jointly but is not stable, as each can gain by undercutting.

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