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Case Study PP

The credit card industry exhibits characteristics of perfect competition despite being dominated by a few large brands. There are over 6,000 banks and credit unions that issue Visa, Mastercard, and other brand cards to over 90 million cardholders in the US. Credit cards are homogeneous products that can be used interchangeably regardless of issuer. Entry and exit from the market is easy for financially sound banks. These characteristics mean the credit card industry meets the criteria for perfect competition.

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6K views

Case Study PP

The credit card industry exhibits characteristics of perfect competition despite being dominated by a few large brands. There are over 6,000 banks and credit unions that issue Visa, Mastercard, and other brand cards to over 90 million cardholders in the US. Credit cards are homogeneous products that can be used interchangeably regardless of issuer. Entry and exit from the market is easy for financially sound banks. These characteristics mean the credit card industry meets the criteria for perfect competition.

Uploaded by

archana_anuragi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case Study: A perfect competition

In 1997, over $700 billion purchases were charged on credit cards, and this total is increasing at a rate of over 10 per cent 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 per cent 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 card holders.
One person's Visa card may have been issued by his company's credit union in Los Angeles, while a next door neighbour may have
acquired hers from a Miami Bank when she was living in Florida. Creditcards 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 for a perfectly competitive market.
Questions
1. What are the characteristics of perfect competition that are exhibited by the credit card industry?
2. Discuss the price and output condition of a perfect competition.
3. Do you think the same competitive state is applicable to the Indian scenario?

Case Study: Mergers of banks


The past fifteen years have seen numerous mergers of banks in every part of the US. Invariably, bank managers point to significant cost
reduction (increasing returns to scale) associated with consolidation of computer systems, combining neighbouring branch outlets and
reduction of corporate overhead expenses as justification. Many of these mergers involved multibillion dollar banks, which appeared to be
inconsistent with existing empirical research on bank costs that showed significant diseconomies of scale for banks with more than $25-50
million in deposits. Unfortunately, these studies used data only for banks with less than $1 billion in deposits. In a more recent study,
Sherrill Shaffer and Edmond David used data for large banks ( those with $2.5 to $121 billion in deposits) and found increasing returns to
scale (i.e., declining per unit costs) up to a bank size of $15 to $37 billion. Clearly, the owners and managers of the merged banks knew more
about their actual cost functions than did the earlier economic analysts. The consistent pattern of mergers of banks much larger than $24 to
$50 million in deposits was strong evidence that the existing research was incorrect.
Questions
1. How can mergers in the banking industry result in economies of scale (cost reduction)?
2. Do you think the same factors can lead to economies of scale in the banking sector in India?
3. What are the other factors that can lead to economies of scale in the banking sector?

Questions
1. What are the characteristics of perfect competition that are exhibited by the credit card industry?
The characteristics of perfect competition that are exhibited by the credit card industry are:
1.
a large number of small firms,
2.
identical products sold by all firms,
3.
perfect resource mobility or the freedom of entry into and exit out of the industry, and
4.
perfect knowledge of prices and technology.
2. Discuss the price and output condition of a perfect competition.
The price and output condition of a perfect competition:
1.
Market Structure
2.
Perfect Competition
3.
Equilibrium of the Firm
4.
Short Run Equilibrium of the Price Taker Firm
5.
Short Run Supply Curve of a Price Taker Firm
6.
Short Run Supply Curve of the Industry
7.
Long Run Equilibrium of the Price Taker Firm
8.
Long Run Supply Curve For the Industry
9.
Price Determination Under Perfect Competition
10.
Market Price
11.
Determination of Short Run Normal Price
12.
Long Run Normal Price and the Adjustment of Market Price to the Long Run Normal Price
13.
Distinction between Market Price and Normal Price
14.
Interdependent Prices
15.
Joint Supply
16.
Fixation of Railway Rates
17.
Composite or Rival Demand
3. Do you think the same competitive state is applicable to the Indian scenario?
Yes, the same competitive state is applicable to the Indian scenario. The main reason for the growth of credit cards as compare to debit cards
is mainly due to provision of overdraft facility which facilitates the customers to make purchases and payment even without having enough
money available in their account. The increase in the number of commercial activities and the growing malls in smaller cities have also
contributed positively in the rise of credit card market.
Questions
1. How can mergers in the banking industry result in economies of scale (cost reduction)?
The mergers in the banking industry result in economies of scale (cost reduction) because of the Cost Efficiency. The most common rationale
for Mergers and Acquisitions activity is believed to be increased cost efficiency. Many mergers have been motivated by a belief that a
significant quantity of redundant operating costs can be eliminated through the consolidation of activities.
2. Do you think the same factors can lead to economies of scale in the banking sector in India?
Mergers can result in increased market power. Banks may buyout each other just to enter new geographic markets or to cut down
competition. The recent example of this is the acquisition of UTI bank with Axis bank. Hence, the same factors can lead to economies of
scale in the banking sector in India.
3. What are the other factors that can lead to economies of scale in the banking sector?
The other factors that can lead to economies of scale in the banking sector include:
Technical factors: These are often comprised of changing the product design and manufacturing so that average costs in the long run are
minimized.
Organizational factors: As firms grow they can afford managerial staff such as a HR and financial department to develop ways of
improving productivity and division of labor. These groups will become more efficient at keeping the books, (other tasks) than an normal
worker would.
Market Power: As a business expands and becomes a bigger competitor in a the market it can lower its marketing costs by demanding
discounts for products when bought in large quantities (bulk buying).
External Returns: This is when one firm benefits from lower average unit costs by taking advantage of the market industry growth.

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