Template-Type: ReDIF-Paper 1.0
Title: Differentiation in Risk Profiles
Author-Name: Christina Brinkmann
Author-Email: christina-brinkmann@uni-bonn.de
Classification-JEL: G12, G23, G28, L13, L15
Keywords: OTC Markets, Derivatives, Central Clearing, Imperfect Competition, Vertical
Product Differentiation

Abstract: This paper offers a model of vertical product differentiation in derivatives markets. Two
dealers that choose their risk profile offer insurance to clients who differ in risk aversion.
For given risk profiles, a unique price equilibrium exists in which the dealer with the lower
risk profile has larger profits. Under plausible conditions, market discipline in the choice
of risk profiles emerges: the first mover chooses a low risk profile, and the second mover
follows at an optimal distance. The result serves as a reference point when considering the
effects of introducing a central counterparty (CCP) that removes the quality dimension of
competition.



Note: 
Length: 66
Creation-Date: 2023-07
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp444
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_444