Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations

46 Pages Posted: 28 Mar 2019

See all articles by Yiwei Dou

Yiwei Dou

New York University (NYU) - Department of Accounting

Geng Li

Federal Reserve Board

Joshua Ronen

New York University (NYU) - Department of Accounting

Date Written: 2019-03-25

Abstract

We study the unintended consequences of consumer financial regulations, focusing on the CARD Act, which restricts consumer credit card issuers' ability to raise interest rates. We estimate the competitive responsiveness-the degree to which a credit card issuer changes offered interest rates in response to changes in interest rates offered by its competitors-as a measure of competition in the credit card market. Using small business card offers, which are not subject to the Act, as a control group, we find a significant decline in the competitive responsiveness after the Act. The decline in responsiveness is more pronounced for competitors' reductions, as opposed to increases, in interest rates, and is more pronounced in areas with more subprime borrowers. The reduced competition underscores the potential unintended consequence of regulating the consumer credit market and contributes toward a more comprehensive and balanced evaluation of the costs and benefits of consumer financial regulations.

Keywords: CARD Act, Competitive responsiveness, Credit card market, Regulations

JEL Classification: L51, G21, E51

Suggested Citation

Dou, Yiwei and Li, Geng and Ronen, Joshua, Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations (2019-03-25). FEDS Working Paper No. 2019-018. Available at SSRN: https://ssrn.com/abstract=3361050 or http://dx.doi.org/10.17016/FEDS.2019.018

Yiwei Dou (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Geng Li

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Joshua Ronen

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

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