3.11 The viatical settlement industry enables terminally ill consumers, typically HIV patients, to borrow against equity in their existing life insurance contracts to finance their consumption and medical expenses. The introduction and dissemination of effective anti-HIV medication in 1996 reduced AIDS mortality, extending patients’ lives and hence delayed when the viatical settlement industry would receive the insurance payments. However, viatical settlement payments (what patients can borrow) fell more than can be explained by greater life expectancy.

The number of viatical settlement firms dropped from 44 in 1995 to 24 in 2001. Sood et al.

(2005) found that an increase in market power of viatical settlement firms reduced the value of life insurance holdings of HIV-positive persons by about $1 billion. When marginal cost rises and the number of firms falls, what happens to the Nash-

Cournot equilibrium price? Use graphs or math to illustrate your answer. (Hint: If you use math, it may be helpful to assume that the market demand curve has a constant elasticity throughout.) M