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

Gajendran Raveendranathan and Kyle Herkenhoff

No 67, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: How are the welfare costs from monopoly borne? We answer this question in the context of the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above competitive pricing, generates excess profits, and has repeatedly lost antitrust lawsuits. We depart from existing consumer credit models that assume perfect competition (e.g. Livshits, MacGee, and Tertilt (2007,2010) and Chatterjee, Corbae, Nakajima, and Rios-Rull, 2007), by integrating oligopolistic lenders into a Bewley-Huggett-Aiyagariframework. Our model accounts for roughly half of the spreads and excess profits observed in the data. The welfare gains to the current population from competitive reforms in the credit card industry are equivalent to a onetime transfer to households worth 3.4 percent of GDP. Along the transition path, all cohorts realize welfare gains from competitive reforms. Asset poor households benefit the most from increased consumption smoothing. Asset rich households also benefit from higher general equilibrium saving interest rates.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-ind and nep-pay
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Related works:
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2020)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
Working Paper: Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry (2019)
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