Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards
43 Pages Posted: 11 Feb 2001
Date Written: December 10, 2001
We test whether a non-binding price ceiling may serve as a focal point for tacit collusion, using data from the credit card market during the 1980s. In our sample, most credit card issuers face a state-level interest rate ceiling, and well over half match their ceiling. We develop an empirical model that can separately identify the instance in which an issuer matches its ceiling because it is binding, and the instance in which an issuer matches its ceiling even though it is not binding. The model yields evidence in favor of tacit collusion: a statistically significant proportion of issuers match their ceiling even though it is not binding. Within a state, tacit collusion is less likely as the ceiling rises, more likely as concentration or costs rise, and less likely in periods of high demand. We also find that entry into credit cards is higher where we find evidence of tacit collusion, and lower where we find evidence that a ceiling is binding. It appears that tacit collusion became less prevalent over the 1980s, as entry into credit cards surged nationwide. The results highlight a perverse effect of price cap regulation.
Keywords: Focal Points, Tacit Collusion, Price Ceilings, Double Hurdle
JEL Classification: L1, L2, C2
Suggested Citation: Suggested Citation