Dealer Pricing of Consumer Credit

44 Pages Posted: 12 Feb 2002

See all articles by Giuseppe Bertola

Giuseppe Bertola

Centre for Economic Policy Research (CEPR); Università di Torino - Dip. di Economia e Statistica

Stefan Hochguertel

VU University Amsterdam; Tinbergen Institute

Winfried Koeniger

University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2002


Interest rates on consumer lending are lower when funds are tied to purchase of a durable good than when they are made available on an unconditional basis. Further, dealers often choose to bear the financial cost of their customers' credit purchases. This Paper interprets this phenomenon in terms of monopolistic price discrimination. We characterize consumers' intertemporal consumption decisions when their borrowing and lending rates are different not only from each other, but also from the internal rate of return of financing terms for a specific durable good purchase. A stylized model offers a closed-form characterization of purchase decisions as a function of the amount and timing of consumers' resources, of the spread between the borrowing and lending rates, and of the pricing of cash and credit purchases. We then study theoretical and empirical relationships between the structure of financial markets, the distribution of potential customers' current and future income, and incentives for durable-good dealers to price-discriminate by subsidizing their liquidity-constrained customers' installment-payment terms. Our empirical analysis takes advantage of a rich set of installment-credit and personal-loan data, which offer considerable support for the assumptions and implications of our theoretical perspective.

Keywords: Price discrimination, financial market development, liquidity constraints

JEL Classification: D10, D42, G20

Suggested Citation

Bertola, Giuseppe and Hochguertel, Stefan and Koeniger, Winfried, Dealer Pricing of Consumer Credit (January 2002). CEPR Discussion Paper No. 3160, Available at SSRN:

Giuseppe Bertola (Contact Author)

Centre for Economic Policy Research (CEPR)

United Kingdom

Università di Torino - Dip. di Economia e Statistica ( email )

Lungo Dora Siena 100
Torino, 10153
+39 011 670 4405 (Phone)

HOME PAGE: http://

Stefan Hochguertel

VU University Amsterdam ( email )

Dept Econ (FEWEB)
De Boelelaan 1105
1081HV Amsterdam
+31 20 59 86033 (Phone)
+31 20 59 89870 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS

Winfried Koeniger

University of St. Gallen ( email )

Swiss Institute for Empirical Economic Research
Varnbüelstr. 14
St.Gallen, CH-9000

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Schaumburg-Lippe Str. 7/9
D-53072 Bonn

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