Oligopoly with Asymmetric Information : Differentiation in Credit Markets

We study an oligopoly model with asymmetric information and product differentiation. The analysis focuses on credit markets. We assume information to be asymmetric with respect to customer characteristics that directly affect bank profits. We analyze the impact of horizontal differentiation, which serves as an index for the degree of competition among banks, on loan-granting practices. We show that with more differentiation (less competition), banks may screen credit applicants less intensively in equilibrium because they compete less aggressively for the most profitable customers. As a result, welfare may actually increase as competition becomes less intense. Total profits may either increase or decrease with the introduction of asymmetric information