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

Kyle F Herkenhoff and Gajendran Raveendranathan

The Review of Economic Studies, 2025, vol. 92, issue 5, 3067-3111

Abstract: We measure the distribution of welfare losses from non-competitive behaviour in the U.S. credit card industry during the 1970s and 1980s. The early credit card industry was characterized by regional monopolies. Ensuing legal decisions led to 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. The transition from monopoly to oligopolistic competition yields welfare gains equivalent to a one-time transfer worth $3,600 (in 2016 dollars) for the bottom decile of earners (roughly 50% of their annual income) versus $1,200 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. Greater competition also explains rising bankruptcies, chargeoffs, and credit to income ratios. Lastly, we bound the welfare gains from competition by computing a perfectly competitive benchmark. Aggregate welfare gains are 40% larger from perfect competition but distributed similarly to oligopolistic competition.

Date: 2025
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