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Degree of Competition of Consumer Loan Industry

Author

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  • Kohei Kubota

    (Graduate School of Economics, Osaka University)

  • Yoshiro Tsutsui

    (Graduate School of Economics, Osaka University)

Abstract

The purpose of this paper is to estimate the degree of competition of consumer loan industry in Japan utilizing responses to a questionnaire survey conducted by Japan Consumer Finance Association. Estimating the cost function, we found that the industry is characterized by large scale economies. Estimation of Lerner index, H-statistics, degree of noncompetition, and degree of collusion reveals that consumer loan market is highly monopolistic. Consumer loan companies answered to a question that they commit neither interest rate competition nor quantity competition through extending branch-networks. We further investigated the reason why consumer loan market is monopolistic. Market for new customers is characterized by informational asymmetry, usury law, and hyperbolic discounting of borrowers, which makes the market monopolistic. Meanwhile, market for incumbent customers is monopolistic because they would not search for new lenders to avoid switching costs. These findings may be useful to draft new regulations on the industry.

Suggested Citation

  • Kohei Kubota & Yoshiro Tsutsui, 2008. "Degree of Competition of Consumer Loan Industry," Discussion Papers in Economics and Business 08-26, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0826
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0826.pdf
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    More about this item

    Keywords

    consumer loans; degree of competition; scale economy; degree of collusion; H-statistics;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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