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Credit Card Competition and Naive Hyperbolic Consumers

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  • Elif Incekara-Hafalir

Abstract

I explain the credit card market’s observed systematic pricing patterns by examining time-inconsistent consumers. I find that time inconsistency steers the competition from long-term borrowing contingent prices to short-term noncontingent ones. This pattern occurs because the consumer in the contracting period underestimates the future charges, and therefore pays attention only to short-term price elements, such as annual fees. The consumer’s risk of default also plays a role in determining who gets which contract. Copyright Springer Science+Business Media New York 2015

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  • Elif Incekara-Hafalir, 2015. "Credit Card Competition and Naive Hyperbolic Consumers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 153-175, April.
    • Handle: RePEc:kap:jfsres:v:47:y:2015:i:2:p:153-175
    DOI: 10.1007/s10693-014-0208-4
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    References listed on IDEAS

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    Cited by:

    1. Paul S. Calem & Julapa Jagtiani & William W. Lang, 2017. "Foreclosure Delay and Consumer Credit Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 52(3), pages 225-251, December.
    2. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    3. Suting Hong & Robert M. Hunt & Konstantinos Serfes, 2023. "Dynamic Pricing of Credit Cards and the Effects of Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 64(1), pages 81-131, August.
    4. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
    5. Daniel Grodzicki & Alexei Alexandrov & Özlem Bedre-Defolie & Sergei Koulayev, 2023. "Consumer Demand for Credit Card Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 273-311, June.

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