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Strategic Responses to Regulatory Threat in the Credit Card Market

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  • Stango, Victor

Abstract

Models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation. I test the implications of these models using stock market data from an episode of regulatory threat in the credit card market. The data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers. Consistent with the regulatory threat hypothesis, price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat. This pattern exists not only for those issuers announcing cuts but also for their rivals, which suggests that the cuts reduced an industry-wide threat of regulation. Factors that proxy for issuers' exposure to and influence on the probability of regulation affect the size of these returns, which provides corroborative evidence in favor of the regulatory threat hypothesis.

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  • Stango, Victor, 2003. "Strategic Responses to Regulatory Threat in the Credit Card Market," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 427-452, October.
  • Handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:427-52
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    Cited by:

    1. Ahmet Faruk Aysan & Nusret Ahmet Muslim, 2006. "The Failure of Competition in the Credit Card Market in Turkey: The New Empirical Evidence," Working Papers 2006/10, Turkish Economic Association.
    2. Justine S. Hastings & Ali Hortaçsu & Chad Syverson, 2013. "Sales Force and Competition in Financial Product Markets: The Case Of Mexico’s Social Security Privatization," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
    3. Wang, Zhu, 2010. "Market structure and payment card pricing: What drives the interchange?," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 86-98, January.
    4. Bonev, Petyo & Glachant, Matthieu & Söderberg, Magnus, 2018. "A Mechanism for Institutionalised Threat of Regulation: Evidence from the Swedish District Heating Market," Economics Working Paper Series 1805, University of St. Gallen, School of Economics and Political Science.
    5. Bruno De Borger & Amihai Glazer, 2015. "Inducing political action by workers," Southern Economic Journal, Southern Economic Association, vol. 81(4), pages 1117-1144, April.
    6. Hendel, Igal E & Lach, Saul & Spiegel, Yossi, 2015. "Consumers' Activism: the Facebook boycott of Cottage Cheese," CEPR Discussion Papers 10460, C.E.P.R. Discussion Papers.

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