S. Hun Seog

The Coexistence of Distribution Systems When Consumers Are Not Informed

We attempt to explain the coexistence of two distribution systems when consumers are poorly informed about price distribution. The interaction of price dispersion and consumer search behavior is shown to affect the choice of marketing systems. We provide a necessary and sufficient condition for the coexistence as a long-run equilibrium. The market may observe the coexistence of the two agency systems regardless of the relative efficiency of agency types, or the domination by the less efficient agency system offering higher average price.

Strategic Demand for Insurance

We focus on the corporate demand for insurance under duopoly. We consider the case in which firms purchase insurance in order to enhance their competitiveness. We show that a higher level of corporate insurance makes a firm more aggressive and its competitor less aggressive in the output market (strategic effect). The optimal coverage of insurance is determined by comparing the strategic effect of insurance and the cost of insurance. The optimal coverage is positive if the strategic effect is greater than the cost of insurance. An interesting implication is that a risk-neutral firm may purchase actuarially unfair insurance. The main strategic effect of insurance comes from the fact that firms purchase insurance before they produce outputs. Insurance makes firms more aggressive due to the limited risk costs of firms.

Insurance Markets With Differential Information

This article attempts to understand the outcomes when each party of an insurance contract simultaneously has superior information. I assume that policyholders have superior information about specific risks while insurers have superior information about general risks. I find that low-general-risk policyholders purchase insurance, while high-general-risk policyholders are self-insured. Among the low-general-risk policyholders, high-specific-risk policyholders purchase full insurance, while low-specific-risk policyholders purchase partial insurance. When insurers can strategically publicize their information, efficiency is improved because high-general-risk policyholders purchase actuarially fair insurance. The market segmentation is also found based on the general-risk type and the publicizing of information.

Informational Cascade in the Insurance Market

We develop an informational cascade model based on Bikhchandani, Hirshleifer, and Welch (1992) with applications to the insurance market. We investigate the existence of cascades and the effects of public information on cascades. We apply the results to insurance markets to explain how catastrophic events may lead to demand increases, how loss shocks may lead to insurance cycles, and how the heterogeneity of policyholders affects the choice of limited tort auto insurance in Pennsylvania.

Response time and vendor-assembler relationship in a supply chain

Relationships between an assembler and a vendor in a supply chain are investigated in two-period models when the assembler wants to reduce response time by incentive systems. The assembler may offer myopic or farsighted incentive contracts to the vendor, under short-term or long-term relationships. Incentive schemes, effort levels, and expected payoffs under different perspectives and relationships are examined. We find that a farsighted assembler provides the vendor with a higher incentive than a myopic assembler in the first period. A long (short)-term relationship is preferred if the value of farsightedness under a long-term relationship is greater (less) than the switching option value under a short-term relationship. We propose several sufficient conditions regarding which perspectives and relationships are preferred.

Equilibrium Price Dispersion in the Insurance Market

We consider price dispersion under nonsequential consumer search when a finite number of firms exists. We assume that firms have the same production technology. We find that single-price equilibrium exists only when it is the highest possible price (monopoly price). Price dispersion is possible in equilibrium only when firms use mixed strategies. We also find that increased competition may increase price dispersion and the intensity of consumer search while reducing the expected profits of firms. The number of firms in the long run is increasing regarding expected market demand and decreasing regarding production cost and entry cost. We reinterpret some empirical observations reported in the literature.

Financing as a Marketing Strategy

This paper investigates the issues concerning a film producer that finances production costs not only by the conventional funding from an institutional investor, but also by “Internet funding,” financing through the Internet from so-called netizen investors. In Internet funding, netizen investors engage in word-of-mouth activities. Assuming that information asymmetry exists between the producer and investors, we investigate how the Internet funding size varies with the word-of-mouth effect, the monitoring effect of the institutional investor, and the bargaining power of the producer over investors. When the producer has no bargaining power, the Internet funding size is determined by balancing the word-of-mouth effect with the monitoring effect by the institutional investment. If there is no word-of-mouth effect, there may be no Internet funding, because netizen investors interpret Internet funding as an indicator of a negative profit. When the producer has high bargaining power, full Internet funding is possible if the information asymmetry of the film quality is resolved. We discuss how information asymmetry can be resolved by the monitoring of the film quality, the producers reputation, or the insurance on investment returns. Our model helps to capture several interesting aspects of Internet funding in the Korean film industry.

Moral Hazard and Health Insurance When Treatment is Preventive

We consider a two‐period model under moral hazard when treatment is preventive. In the second period, the treatment level under moral hazard is higher than that under no moral hazard. However, it may be lower than that under moral hazard when overinsurance is not allowed. In the first period, the treatment level is higher when treatment is preventive than when it is not. Treatment level is also higher as the discount factor increases. We demonstrate that a treatment increase following a coverage increase does not necessarily imply moral hazard. These findings imply that moral hazard is possibly overemphasized in the literature.

Double-Sided Adverse Selection in the Product Market and the Role of the Insurance Market

I investigate the interrelation between a product market and an insurance market when adverse-selection problems exist both in consumers and in firms. Firms offer warranties for product failures. Consumers may further purchase first-party insurance for the residual risks of product failures. Given that the insurance market exists, two types of equilibria are possible: (a) Different firm types offer different pooling warranties attracting both good and bad consumer types or (b) good firms attract only bad consumers and bad firms attract both types of consumers. I discuss the existence and the efficiency implication of the insurance market.

On the Competition between Insurers With Superior Information

We reinvestigate the case in which insurers have superior information regarding consumers risk types, as studied by Villeneuve (2005, European Economic Review 49, 321-340). While Villeneuve produces interesting results on insurance contracts, the diverse outcomes make it difficult to pinpoint main implications. We make slight changes to the conditions in the Villeneuves model by considering that there are a large number of insurers to ensure the competitive market; and that, in an equilibrium, contracts are required to be optimal even if some consumers are allowed to visit not all insurers announcing the same menus. We demonstrate that no pooling equilibrium can exist and that a separating equilibrium exists if and only if the difference between loss probabilities of types is large (types are distant). In a separating equilibrium, low risks are fully insured with actuarially fair premium, while high risks are self-insured. Our results provide a refinement of Villeneuve (2005), which is analogous to the monopoly case. This paper clarifies that high risk consumers bear information costs when insurers have superior information, in contrast with standard adverse selection models.