Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards

43 Pages Posted: 11 Feb 2001

See all articles by Christopher R. Knittel

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Victor Stango

UC Davis Graduate School of Management

Date Written: December 10, 2001

Abstract

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

Knittel, Christopher R. and Stango, Victor, Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards (December 10, 2001). Available at SSRN: https://ssrn.com/abstract=294381 or http://dx.doi.org/10.2139/ssrn.294381

Christopher R. Knittel (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Victor Stango

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
261
Abstract Views
2,008
rank
115,404
PlumX Metrics