IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/26604.html
   My bibliography  Save this paper

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

Author

Listed:
  • Kyle F. Herkenhoff
  • Gajendran Raveendranathan

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.

Suggested Citation

  • Kyle F. Herkenhoff & Gajendran Raveendranathan, 2020. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," NBER Working Papers 26604, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26604
    Note: AP IO
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w26604.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jaromir B. Nosal & Lukasz A. Drozd, 2008. "Competing for Customers: A Search Model of the Market for Unsecured Credit," 2008 Meeting Papers 274, Society for Economic Dynamics.
    2. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-193, April.
    3. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    4. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    5. Mateos-Planas, Xavier, 2013. "Credit limits and bankruptcy," Economics Letters, Elsevier, vol. 121(3), pages 469-472.
    6. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," Department of Economics Working Papers 2018-05, McMaster University.
    7. Kyle Herkenhoff, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," 2016 Meeting Papers 781, Society for Economic Dynamics.
    8. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2015. "Regulating Consumer Financial Products: Evidence from Credit Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 111-164.
    9. Kartik Athreya & José Mustre-del-Río & Juan M Sánchez, 2019. "The Persistence of Financial Distress," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3851-3883.
    10. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    11. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2023. "How Costly Are Markups?," Journal of Political Economy, University of Chicago Press, vol. 131(7), pages 1619-1675.
    12. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
    13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    14. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    15. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2012. "A Quantitative Theory of Information and Unsecured Credit," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 153-183, July.
    16. Mr. Christopher Carroll & Mr. Martin Sommer & Mr. Jiri Slacalek, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 2012/219, International Monetary Fund.
    17. Dean Corbae & Pablo D'Erasmo, 2014. "Capital requirements in a quantitative model of banking industry dynamics," Working Papers 14-13, Federal Reserve Bank of Philadelphia.
    18. Manolis Galenianos & Alessandro Gavazza, 2022. "Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1897-1932.
    19. David Berger & Kyle Herkenhoff & Simon Mongey, 2022. "Labor Market Power," American Economic Review, American Economic Association, vol. 112(4), pages 1147-1193, April.
    20. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    21. Simon Mongey, 2017. "Market Structure and Monetary Non-neutrality," Staff Report 558, Federal Reserve Bank of Minneapolis.
    22. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-480, June.
    23. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, vol. 94(4), pages 944-963, September.
    24. James A. Schmitz, 2012. "New and larger costs of monopoly and tariffs," Staff Report 468, Federal Reserve Bank of Minneapolis.
    25. Ricardo Serrano-Padial & Lukasz Drozd, 2014. "On Prepayment and Rollover Risk in the US Credit Card Market," 2014 Meeting Papers 215, Society for Economic Dynamics.
    26. Philippe Weil & Etienne Wasmer, 2004. "The macroeconomics of credit and labor market imperfections," ULB Institutional Repository 2013/13436, ULB -- Universite Libre de Bruxelles.
    27. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2013. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 193-221, January.
    28. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    29. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    30. Igor Livshits & James C. Mac Gee & Michèle Tertilt, 2016. "The Democratization of Credit and the Rise in Consumer Bankruptcies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(4), pages 1673-1710.
    31. Lukasz A. Drozd & Ricardo Serrano-Padial, 2017. "Modeling the Revolving Revolution: The Debt Collection Channel," American Economic Review, American Economic Association, vol. 107(3), pages 897-930, March.
    32. repec:fip:fedmsr:476 is not listed on IDEAS
    33. Conesa, Juan Carlos & Costa, Daniela & Kamali, Parisa & Kehoe, Timothy J. & Nygard, Vegard M. & Raveendranathan, Gajendran & Saxena, Akshar, 2018. "Macroeconomic effects of Medicare," The Journal of the Economics of Ageing, Elsevier, vol. 11(C), pages 27-40.
    34. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    35. Mark Egan & Ali Hortaçsu & Gregor Matvos, 2017. "Deposit Competition and Financial Fragility: Evidence from the US Banking Sector," American Economic Review, American Economic Association, vol. 107(1), pages 169-216, January.
    36. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    37. Hunt Robert M., 2003. "An Introduction to the Economics of Payment Card Networks," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-17, June.
    38. J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.
    39. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    40. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
    41. Adrien Auclert & Kurt Mitman, 2018. "Bankruptcy and Aggregate Demand," 2018 Meeting Papers 1085, Society for Economic Dynamics.
    42. Natalia Kovrijnykh & Igor Livshits & Ariel Zetlin-Jones, 2019. "Building Credit History with Heterogeneously Informed Lenders," Working Papers 19-17, Federal Reserve Bank of Philadelphia.
    43. Mateos-Planas, Xavier & Seccia, Giulio, 2006. "Welfare implications of endogenous credit limits with bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2081-2115, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    2. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    3. Braxton, John Carter & Chikhale, Nisha & Herkenhoff, Kyle & Phillips, Gordon, 2024. "Intergenerational Mobility and Credit," IZA Discussion Papers 16826, Institute of Labor Economics (IZA).
    4. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    5. Li, Quan & Zha, Yong & Dong, Yu, 2023. "Subsidize or Not: The Competition of Credit Card and Online Credit in Platform-based Supply Chain System," European Journal of Operational Research, Elsevier, vol. 305(2), pages 644-658.
    6. Tal Gross & Raymond Kluender & Feng Liu & Matthew J. Notowidigdo & Jialan Wang, 2021. "The Economic Consequences of Bankruptcy Reform," American Economic Review, American Economic Association, vol. 111(7), pages 2309-2341, July.
    7. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    8. David Berger & Kyle Herkenhoff & Andreas R. Kostøl & Simon Mongey, 2023. "An Anatomy of Monopsony: Search Frictions, Amenities, and Bargaining in Concentrated Markets," NBER Chapters, in: NBER Macroeconomics Annual 2023, volume 38, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    2. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    3. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," Department of Economics Working Papers 2018-05, McMaster University.
    4. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2605-2642.
    5. Gajendran Raveendranathan & Georgios Stefanidis, 2022. "Designing “Win-Win” Rate Caps," Department of Economics Working Papers 2022-03, McMaster University.
    6. Danisewicz, Piotr & Elard, Ilaf, 2023. "The real effects of financial technology: Marketplace lending and personal bankruptcy," Journal of Banking & Finance, Elsevier, vol. 155(C).
    7. Florian Exler & Michèle Tertilt, 2020. "Consumer Debt and Default: A Macro Perspective," CESifo Working Paper Series 8105, CESifo.
    8. Dean Corbae & Pablo D'Erasmo, 2014. "Capital requirements in a quantitative model of banking industry dynamics," Working Papers 14-13, Federal Reserve Bank of Philadelphia.
    9. Mateos-Planas, Xavier, 2013. "Credit limits and bankruptcy," Economics Letters, Elsevier, vol. 121(3), pages 469-472.
    10. Davis, Andrew & Kim, Jiseob, 2017. "Explaining changes in the US credit card market: Lenders are using more information," Economic Modelling, Elsevier, vol. 61(C), pages 76-92.
    11. Juan M. Sánchez, 2018. "The Information Technology Revolution And The Unsecured Credit Market," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 914-930, April.
    12. Mankart, Jochen & Rodano, Giacomo, 2015. "Personal bankruptcy law, debt portfolios, and entrepreneurship," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 157-172.
    13. Satyajit Chatterjee & Dean Corbae & Kyle Dempsey & José‐Víctor Ríos‐Rull, 2023. "A Quantitative Theory of the Credit Score," Econometrica, Econometric Society, vol. 91(5), pages 1803-1840, September.
    14. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    15. Thomas Hintermaier & Winfried Koeniger, 2016. "Debt Portfolios and Homestead Exemptions," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 103-141, October.
    16. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
    17. Bulent Guler, 2015. "Innovations in Information Technology and the Mortgage Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 456-483, July.
    18. Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
    19. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    20. Daphne Chen & Jake Zhao, 2017. "The Impact of Personal Bankruptcy on Labor Supply Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 40-61, October.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:26604. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.