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

Kyle Herkenhoff and Gajendran Raveendranathan

No 26604, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 D43 D60 E21 E44 G21 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-com and nep-mac
Note: AP IO
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
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