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The Failure of Competition in the Credit Card Market

Lawrence M. Ausubel
The American Economic Review
Vol. 81, No. 1 (Mar., 1991), pp. 50-81
Stable URL: http://www.jstor.org/stable/2006788
Page Count: 32
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The Failure of Competition in the Credit Card Market
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Abstract

The bank credit card market, containing 4,000 firms and lacking regulatory barriers, casually appears to be a hospitable environment for the model of perfect competition. Nevertheless, this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds. Moreover, major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the period 1983-1988. The failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances.

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