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Economic Regulation in the Consumer Loans Market

Author

Listed:
  • Nobuhiro Mori

    (Nara University of Education)

  • Makoto Okamura

    (Hiroshima University)

  • Takao Ohkawa

    (Ritsumeikan University)

Abstract

This paper models a consumer loan market with a vertical structure where an upstream monopolist supplies funds to downstream nonbanks. The nonbanks supply funds to consumers in the consumer loans market. An inverse demand function of the consumer is linear. The downstream nonbank freely enters the market as long as it earns a positive profit. First, this paper derives free-entry equilibrium without government regulation. Next, this paper examines the effects of government regulation on the entry of nonbanks. Two regulatory schemes are investigated: partial regulation, wherein the government can only control the interest rate the monopolist sets, and full regulation, wherein the government can control the number of nonbanks as well as the interest rate. This paper presents four new results. First, downstream firms insufficiently enter the market under partial regulation. Second, downstream firms excessively enter the market under full regulation. Third, the establishment of the upstream public firm improves welfare even though its profit is negative under partial regulation. Fourth, full regulation is welfare improving compared to partial regulation.

Suggested Citation

  • Nobuhiro Mori & Makoto Okamura & Takao Ohkawa, 2020. "Economic Regulation in the Consumer Loans Market," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(4), pages 447-459, December.
    • Handle: RePEc:kap:atlecj:v:48:y:2020:i:4:d:10.1007_s11293-020-09685-z
    DOI: 10.1007/s11293-020-09685-z
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    References listed on IDEAS

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