Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry

58 Pages Posted: 2 Jan 2020

See all articles by Gajendran Raveendranathan

Gajendran Raveendranathan

McMaster University

Kyle Herkenhoff

University of Minnesota - Minneapolis

Multiple version iconThere are 3 versions of this paper

Date Written: December 9, 2019

Abstract

How are the welfare costs from monopoly distributed across U.S. households? We answer this question for the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above perfectly competitive pricing, and has repeatedly lost antitrust lawsuits. We depart from existing competitive models by integrating oligopolistic lenders into a heterogeneous agent, defaultable debt framework. Our model accounts for 20 to 50 percent of the spreads observed in the data. Welfare gains from competitive reforms in the 1970s are equivalent to a one-time transfer worth between 0.24 and 1.66 percent of GDP. Along the transition path, 93 percent of individuals are better off. Poor households benefit from increased consumption smoothing, while rich households benefit from higher general equilibrium interest rates on savings. Transitioning from 1970 to 2016 levels of competition yields welfare gains equivalent to a one-time transfer worth between 1.87 and 3.20 percent of GDP. Lastly, homogeneous interest rate caps in 2016 deliver limited welfare gains.

Keywords: welfare costs of monopoly, consumer credit, competition, welfare

JEL Classification: D14, D43, D60, E21, E44, G21

Suggested Citation

Raveendranathan, Gajendran and Herkenhoff, Kyle, Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (December 9, 2019). Available at SSRN: https://ssrn.com/abstract=3501917 or http://dx.doi.org/10.2139/ssrn.3501917

Gajendran Raveendranathan (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://sites.google.com/site/gajendranraveendranathan/home

Kyle Herkenhoff

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

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