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

59 Pages Posted: 6 Jan 2020 Last revised: 12 Mar 2023

See all articles by Kyle Herkenhoff

Kyle Herkenhoff

University of Minnesota - Minneapolis

Gajendran Raveendranathan

McMaster University

Multiple version iconThere are 3 versions of this paper

Date Written: January 2020

Abstract

We measure the distribution of welfare losses from non-competitive behavior in the U.S. credit card industry during the 1970s and 1980s. The early credit card industry was characterized by regional monopolies that excluded competition. Several landmark court cases led the industry to adopt competitive reforms that resulted in greater, but still limited, oligopolistic competition. We measure the distributional consequences of these reforms by developing and estimating a heterogeneous agent, defaultable debt framework with oligopolistic lenders. Welfare gains from greater lender entry in the late 1970s are equivalent to a one-time transfer worth $3,400 (in 2016 dollars) for the bottom decile of earners (roughly 50% of their annual income) versus $900 for the top decile of earners. As the credit market expands, low-income households benefit more since they rely disproportionately on credit to smooth consumption. We find that greater lender entry resulting from these reforms delivers 65% of the potential gains from competitive pricing.

Suggested Citation

Herkenhoff, Kyle and Raveendranathan, Gajendran, Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (January 2020). NBER Working Paper No. w26604, Available at SSRN: https://ssrn.com/abstract=3514342

Kyle Herkenhoff (Contact Author)

University of Minnesota - Minneapolis ( email )

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

Gajendran Raveendranathan

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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

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