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Microcredit and Price Competition: standardize to differentiate

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  • Paolo Casini

Abstract

Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that, there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our model in terms of price caps, market entry and outreach measurement.

Suggested Citation

  • Paolo Casini, 2014. "Microcredit and Price Competition: standardize to differentiate," LICOS Discussion Papers 34914, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    • Handle: RePEc:lic:licosd:34914
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    File URL: https://feb.kuleuven.be/drc/licos/publications/dp/dp349
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    More about this item

    Keywords

    Micro nance; Competition; Altruism; Contract Menus; Credit Rationing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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