Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry / Kyle F. Herkenhoff, Gajendran Raveendranathan.

Format:

Book

Author/Creator:

Herkenhoff, Kyle F.

Contributor:

National Bureau of Economic Research.

Raveendranathan, Gajendran.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26604.

NBER working paper series no. w26604

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

We measure the distribution of welfare losses from non-competitive behavior in the U.S. credit card industry during the 1970s and 1980s. The early credit card industry was characterized by regional monopolies that excluded competition. Several landmark court cases led the industry to adopt competitive reforms that resulted in greater, but still limited, oligopolistic competition. We measure the distributional consequences of these reforms by developing and estimating a heterogeneous agent, defaultable debt framework with oligopolistic lenders. Welfare gains from greater lender entry in the late 1970s are equivalent to a one-time transfer worth $3,400 (in 2016 dollars) for the bottom decile of earners (roughly 50% of their annual income) versus $900 for the top decile of earners. As the credit market expands, low-income households benefit more since they rely disproportionately on credit to smooth consumption. We find that greater lender entry resulting from these reforms delivers 65% of the potential gains from competitive pricing.

Notes:

Print version record

January 2020.