Insuring Product Markets

We formally link insurance markets with product markets and identify a demand effect of insurance: if risk-averse consumers can buy insurance against possible product failure, there will be some additional consumers that buy the product because they can also purchase protection. The concomitant upward pressure on price is further fueled by those consumers that have a higher willingness to pay if they can also buy insurance. But a higher price causes those consumers to leave the market that would have bought the product absent insurance. Introducing insurance thus has an ambiguous effect on price, consumers' surplus, and total surplus.