This is an interesting question for IO geeks. At present, we Kiwis collectively own & operate a no-fault insurer, the ACC, which has a statutory monopoly in several big insurance markets.
From this starting point, the merits of opening some or all of ACC’s domain to competition depend (in part) on a value tradeoff between
- Economies of scale because of risk pooling effects (which is a pro-monopoly effect); and
- Quiet life effects on productive efficiency (pro-competition).
God (or ACC or Treasury) might know how large these effects are but as ignorant owners, what kind of goals should we set for a reform process?
I’d want to see if we could bank the scale benefits and then use market-like mechanisms (i.e. incentive contracts) to encourage productive efficiency. Done well, a layer of competing service providers might be able to deliver good value, as it does for rubbish collection and for credit card services.
I look forward to the details.
If there are economies of scale, won’t the most effecient provider naturally become the monopoly holder. In this case ACC should be the most effecient provider as it has the economies of scale. If another provider can do it cheaper then we will have competition and surely this would lead to a more effecient outcome.
If another provider cannot be more effecient (than ACC with economies of scale) then how is this any different wot what we have already? except it now proves we have the most effecient provider, because the market is contestable.
“At present, we Kiwis collectively own & operate a no-fault insurer, the ACC, which has a statutory monopoly in several big insurance markets.”
Own? As Grossman/Hart/Moore point out, ownership is having residual control rights and I hadn’t noticed that “we Kiwis” had such rights. Those rights are firming in the hands of the government and its lackeys.
@Steven: These are certainly the big effects. What interests me is whether making some of these markets contestable will create net efficiencies. By liberalising, we could let the market to sort it out, but if we already have a basically efficient structure then why should we incur the costs associated with that experiment?
@Paul: Yes but we do elect the government, and we are collectively responsible for the financial performance of ACC.