Consumer Credit and Competition: The Puzzle of Competitive Credit Markets

Abstract:     
Consumer credit markets in the US present a puzzle. As competing explanations are offered for the recent sub-prime mortgage crisis and skyrocketing default rates for unsecured consumer credit,1 two seemingly inconsistent facts confound the discussion. While consumer credit markets are, by all accounts, competitive, consumers find themselves saddled with unsustainable amounts of debt that accrues interest at rates that are exorbitant. How could these two situations exist simultaneously? It is an article of antitrust faith that competitive markets are good for consumers. In a world of competitive markets, there is a limited role for consumer protection. So long as products are transparent, then consumer preferences, price competition and the invisible hand should produce market nirvana.

In order to untangle the relationship between competition and consumer credit, one must recognise that there are really four “competition” stories in play. The first is the standard competition story between and among lenders for customers. The second is competition between and among lending technologies driven by regulatory arbitrage. The third is competition based on product innovation and differentiation, and the fourth is competition among regulators. Each of these “competition” stories offers a distinct set of lessons for those who would try to reform consumer credit markets. Without understanding each of the four stories, and the interrelationship among them, reform is likely to miss the mark.

In this short essay, we will seek to sketch the paradox of competition and consumer protection. Then we will sketch four interrelated competition stories, some potential competitive benefits and the respective market pathologies of each. Next, we will evaluate a number of pending US regulatory reforms in light of these concerns. Finally, we will suggest the outlines of a coordinated regulatory architecture that seeks to channel the various “competitions” in productive directions, without unduly stifling those competitive efforts.

Number of Pages in PDF File: 10

Keywords: consumer credit, consumer protection, antitrust, law and economics, commercial law, contracts

Accepted Paper Series