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competition model with a cost-reducing stage prior to the price game and a settlement stage following it, we show that price deregulation entails decreasing monitoring investments and increasing claims both in the short and long run. Even equilibrium premiums may steadily increase if the “competition effect” connected to new entries is outweighed by a “monitoring effect” that raises marginal costs. KEYWORDS: motor insurance, settlement, cost reducing investments, deregulation ∗We thank Luigi Buzzacchi, Don Hester, Patrick Legros, Emma Sarno, the Editor Ching-to Albert Ma

. The paper studies the net effect of restructuring on retail prices and cost-reducing investment and discusses policy implications. JEL classification: D43, L43. Keywords: Access pricing; investment; double marginalization; vertical fore- closure; product differentiation. 1. INTRODUCTION It is widely believed that introducing competition is the key to achieving the full benefits of privatization in previously monopolized and regulated network industries, such as telecommunications, electricity or railways.1 The recent wave of ‘deregulation’ in these industries – i

) and our article are complements. Second, he did not consider a case in which heterogeneous firms engage in R&D. Stenbacka (1991) considered the case in which the results of a cost-reducing investment are uncertain and the realization of the results is private information belonging to the innovating firm. He then examined whether merger anticipation leads to ex ante incentives for innovating firms to reveal their cost-reducing information. 5 Barros (1998) investigated a simple model highlighting the basic economic intuition about the relationship between initial

Bertrand Equilibria Review of Economic Studies 53 85 92 Routledge, R. 2010. “Bertrand Competition with Cost Uncertainty.” Economics Letters 107:356–9. 10.1016/j.econlet.2010.03.006 Routledge R 2010 Bertrand Competition with Cost Uncertainty Economics Letters 107 356 9 Spulber, D. 1995. “Bertrand Competition When Rivals’ Costs Are Unknown.” Journal of Industrial Economics 43:1–11. 10.2307/2950422 Spulber D 1995 Bertrand Competition When Rivals’ Costs Are Unknown Journal of Industrial Economics 43 1 11 Thomas, C. 1997. “Disincentives for Cost-Reducing Investment

marginal e¤ectiveness of investment in cost reduction. Therefore, the indirect e¤ect always expands the optimal scale of …rms as long as …rms invest more with higher regulation. If the direct e¤ect works in the same direction as the indirect e¤ect, higher regulation is likely to lead to an equilibrium path with more shake-out of …rms. Even if the direct e¤ect does not expand the optimal scale of …rms, if the indirect e¤ect gener- ated by cost reducing investment is su¢ ciently strong and, in particular, the marginal cost of …rms fall sharply with investment, larger shake

reducing investment, i. e. a reduction of t, would then reduce the negative external effect). We will now determine the t∗ that satisfy t∗ = t̂ as a function of β: This condition is fulfilled if equation (24) holds for some combination of t∗ and β. The derivatives of Π1 with respect to t for quantity and price competition can easily be determined after inserting 9The investment in transport cost reduction is quite similar to cost reducing R&D (see e. g. Brander and Spencer). However, strategic R&D is usually analyzed in a framework with product market competition in an

literature. Note that in our setting, the cost-reducing investments could also be interpreted as investments to increase consumers’ willingness-to-pay (i.e., product innovation). The degree of spillovers represents the proportion of the rival’s cost reduction that enters additively and costlessly into a firm’s cost reduction. Firm i ’s profit is then given by (3) π i ( q i B ,   q i S ,   x i ,   x j ) = p i B q i B + p i S q i S − C ( q i B ,   q i S ,   x i ,   x j ) ,  (3) $${\pi _i}(q_i^B,\;q_i^S,\;{x_i},\;{x_j}) = p_i^Bq_i^B + p_i^Sq_i^S - C

investments and one of the firms has an ex ante qual- ity advantage, d. This setting is similar to the main part in which each firm engages in cost-reducing investments and one has an ex ante cost disadvan- tage, d. We can show that a model with quality investments yields the same results as in the main part. A cost difference between these firms can appear in various contexts. An important example is international competition under import tariffs. An- other example is in the context of vertical foreclosure, where a vertically in- tegrated firm faces a smaller input price

under the advertising and random equilibria. The random equilibrium is a limiting case in which rms pool at zero advertising. The resulting market share allocation is incentive compatible. 21In the complete-information game considered here, all rms set the same price and in- formed consumers are indierent when using the advertising search rule. By contrast, Bag- well and Ramey (1994a) allow rms to make cost-reducing investments, and this ensures that higher-advertising rms oer strictly lower prices. In the analysis of advertising equi- libria considered here, the

investment stage. 6 Hence a firm’s investment xa is given by ps s n @gi @xi xa ðga þ nÞ2 1 ¼ 0 ð11Þ where ga :5 gi(xa, xa). 7 Implicit differentiation of (11) shows that investments under the GPS increase in the output price. Intuitively, for any given innovation yi a higher price induces more output [see (6)]. This makes cost- reducing investments more beneficial. Using (6) and (9), expected overall output is qaðpÞ :¼ E qi þ qjjxa ¼ 2p 1 sE yni jxa ¼ 2p 1 s ga ga þ n ð12Þ The effect of spillovers on investments and output depends on the characteristics of the