Working Paper: NBER ID: w26604
Authors: Kyle F. Herkenhoff; Gajendran Raveendranathan
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.
Keywords: credit card industry; monopoly; welfare costs; oligopoly; consumer credit
JEL Codes: D14; D43; D60; E21; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lender entry (G21) | welfare gains for low-income households (H53) |
| monopoly lender (G21) | increase in welfare for low-income households (H53) |
| collusive-Cournot duopoly of twenty lenders (D43) | larger welfare gains for low-income households (H53) |
| competitive pricing reforms (L11) | achieve 65% of potential welfare gains (D60) |
| monopoly pricing structures (D42) | low-income households suffer disproportionately (I32) |