Question

PART B

Case Study: Perfect Competition in the Credit Card Industry

In 1997, over $700 billion purchases were charged on credit cards, and this total is increasing at a rate of over 10 percent a year. At first glance, the credit card market would seem to be a rather concentrated industry. Visa, MasterCard, and American Express are the most familiar names, and over 60 percent of all charges are made using one of these three cards. But on closer examination, the industry seems to exhibit most characteristics of perfect competition. Consider first the size and distribution of buyers and sellers. Although Visa, MasterCard, and American Express are the choices of the majority of consumers, these cards do not originate from just three firms. In fact, there are over six thousand enterprises (primarily banks and credit unions) in the US that offer charge cards to over 90 million credit cardholders. One person's Visa card may have been issued by his company's credit union in Los Angeles, while a next-door neighbor may have acquired hers from a Miami Bank when she was living in Florida. Credit cards are a relatively homogenous product. Most Visa cards are similar in appearance, and they can all be used for the same purposes. When the charge is made, the merchant is unlikely to notice who it was that actually issued the card. Entry into and exit from the credit card market is easy as evidenced by the 6000 institutions that currently offer cards. Although a new firm might find it difficult to enter the market, a financially sound bank, even one of modest size, could obtain the right to offer a MasterCard or a Visa card from the present companies with little difficulty. If the bank wanted to leave the field, there would be a ready market to sell its accounts to other credit card suppliers. Thus, it would seem that the credit card industry meets most of the characteristics of a perfectly competitive market.

Please read the case study above on Credit Card Industry and answer the following questions with necessary graphs.

1. What are the characteristics of perfect competition that are exhibited by the credit card industry?
2. Discuss the price and output condition of perfect competition.
3. How can credit card companies bring in the elements of monopolistic or imperfect competition in this industry?
4. And what strategies could the credit card companies use to turn this market into an oligopolistic market?

Answer 1

1. The credit market gives the same facilities, looks the same and has easy entry and exit from the market by selling its account to other credit card supplies. The are the characteristics of perfect competition.

2. The price of perfect competition is set by the intersection of demand and supply. The price is fixed for all suppliers of the credit card suppliers. the supply technology of each credit card supplier decides the supply for each credit card supplier.

3. The credit card companies can merge together. The single credit card supplier can act as a monopolistic seller of credit card.

4. Each new credit card supplier can give attractive features or reduce price to attract customers. This will make different credit card suppliers enter into price cut/feature compeetition.