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Price ceilings as focal points for tacit collusion: evidence from credit cards

  • Christopher R. Knittel
  • Victor Stango

We test whether a non-binding price ceiling may serve as a focal point for tacit collusion. Our sample contains data from the credit card market during the 1980s; in the sample, most credit card issuers face a state-level interest rate ceiling, and well over half match their ceiling. Our empirical model explicitly allows for the possibility that ceilings may have been binding. The model yields evidence in favor of tacit collusion: a statistically significant proportion of issuers match their ceiling even though it is not binding. Within a state, tacit collusion is less likely as the ceiling rises, more likely as concentration or costs rise, and less likely in periods of high demand. We also find that entry into credit cards is higher where we find evidence of tacit collusion, and lower where we find evidence that a ceiling is binding. It appears that tacit collusion became less prevalent over the 1980s, as entry into credit cards surged nationwide. The results highlight a largely unconsidered adverse effect of price cap regulation.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-01-12.

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Date of creation: 2001
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Handle: RePEc:fip:fedhwp:wp-01-12
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