Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations

Yiwei Dou, Geng Li and Joshua Ronen

No 2019-018, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the unintended consequences of consumer financial regulations, focusing on the CARD Act, which restricts consumer credit card issuers? ability to raise interest rates. We estimate the competitive responsiveness-the degree to which a credit card issuer changes offered interest rates in response to changes in interest rates offered by its competitors-as a measure of competition in the credit card market. Using small business card offers, which are not subject to the Act, as a control group, we find a significant decline in the competitive responsiveness after the Act. The decline in responsiveness is more pronounced for competitors? reductions, as opposed to increases, in interest rates, and is more pronounced in areas with more subprime borrowers. The reduced competition underscores the potential unintended consequence of regulating the consumer credit market and contributes toward a more comprehensive and balanced evaluation of the costs and benefits of consumer financial regulations.

Keywords: CARD Act; Competitive responsiveness; Credit card market; Regulations (search for similar items in EconPapers)
JEL-codes: E51 G21 L51 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-03-25
New Economics Papers: this item is included in nep-ban, nep-com, nep-ind, nep-mac and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-18

DOI: 10.17016/FEDS.2019.018

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