This grant has produced a paper, co-authored with Professor Austan Goolsbee of the University of Chicago, entitled "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry" which has been submitted to the Journal of Political Economy.
The researchers matched survey data from the Life Insurance Market Research Association on the prices of insurance policies and owner and policy characteristics with data on the growth of Internet usage from the consulting firm Forrester. Their regression results indicate that the Internet significantly increased price competition in this market. Once the online insurance sites began, the faster a group adopted the Internet, the faster prices of term life insurance fell for those groups. Groups were defined in terms of age, state, occupation, and income. Controlling for these factors, a 10 percent increase in the share of individuals in a group using the Internet reduces average insurance prices for the group by as much as 5 percent. The total impact from 1995 to 1997 reduced prices by 8 to 15 percent and increased consumer surplus by $115-215 million per year and perhaps more. The researchers’ results seem robust because they find that the Internet did not have any effect on prices during the period before the insurance web sites existed, nor on prices of life insurance products not covered by the web sites.
The paper is also available as National Bureau of Economic Research working paper number 7996.
