The Evolution of Competition in the Credit Card Market

This paper establishes how the classical facts characterizing a failure of competition in credit card lending during the 1980s are largely reversed in the decades following. Between 1990 and 2008 lenders' mark-ups decreased by 35 percent, profits shrank by 32 percent relative the average in banking, and prices became nearly 3 times more responsive to cost. Despite this competitive trend, market concentration rose considerably. Extending previous theories of limited competition in credit card lending, this paper argues that these changes can be explained by considering the role of costly screening in mitigating adverse selection. Complementary descriptive evidence is then presented in favor of this view