Kevin Drum must really really dislike price discrimination. He recently complained about supermarkets offering reward card discounts, and now he is against Proposition 17 in California, a ballot initiative that would allow a little bit of price discrimination in auto insurance. Although perhaps I should not say that he really really dislikes price discrimination, because as with the rewards card discounts I think Kevin’s objection is based on an incorrect assesment of the impact of the price discrimination on consumers. I think if he agreed with me on the impacts, he would likely agree that price discrimination is desirable in both cases.

The issue here is that California prevents auto insurance companies from setting rates for an individual based on anything other than three factors: their driving record, how many miles they drive, and their years of driving experience. There are exceptions to this rule though, one of which is loyalty discounts, where an insurance company can offer lower rates to a customer who has been with them for a couple of years. The proposition seeks to change the law so that insurers can offer a discount for length-of-time insured by any company, which effectively lets individuals take their loyalty discounts with them to other insurance companies.

So right now if you’ve had auto insurance with Company A for 5 years and are getting a 10% discount, if you want to switch to Company B you lose that 10% discount. If this law passes, then Company B can also offer you a discount so that you don’t lose the discount by switching. Thus the effect of the law will be to lower switching costs for people who have had auto insurance for a long time. By lowering switching costs, this law will make the market for insurance for people who have been insured for a long time more competitive, and will force auto insurers to offer better deals to long-time customers to prevent them from switching to other auto insurers. In fact the law as structured doesn’t really serve any purpose but to protect entrenched insurers with existing customer bases from competition by market entrants.

Kevin claims this will raise rates for some people, but the rates for people who have not had insurance for long enough to receive a discount, like first time buyers, will be just as competitive as before, and thus will not be affected by this law.

I think Kevin’s problem is that wherever he sees price discrimination he sees prices going up for some people, but that is not always the case, in fact a lot of price discrimination is pro-competitive. This auto insurance example seems likely to be one of those pro-competitive cases.