Monday, August 31, 2015

Case Study: Perfect Competition in Credit Card Industry !

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?

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. 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 compared 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.

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14 comments:

Unknown said...
This comment has been removed by the author.
Unknown said...

#15BAL120#

Credit cards facilitates the buyer(consumer) in purchasing things, even though he/she has no balance in the account up to certain limit.
However,this facility may draw him/her to spend in purchasing unnecessary things and makes
him/her extravagant.
He/she has to pay the debt and recoup his/her account.
Isn't it against the saving habits of Indian society and the accepted norms that one should spend according to his needs only?

Anonymous said...


Credit cards do more harm than good to the consumer as a whole. The credit card industry has caused more people to go into debt than any other industry. They have been the source of more heartache, grief, and deceit than any other industry save perhaps the collection companies. However, credit card companies have their own collections departments so they still fall into that category. the one gets in a habit of purchasing unnecessary

ADITI FAGERIA said...

Yes credit card company has power to influence people by the offer that without having money you can buy. It leads to people stop thinking rationally and spend money without caring about their budget.

ADITI FAGERIA said...

Yes credit card company has power to influence people by the offer that without having money you can buy. It leads to people stop thinking rationally and spend money without caring about their budget.

Anonymous said...
This comment has been removed by the author.
Anonymous said...

I agree that Credit card industry largely resembles the perfectly competitive market. India has also entered this almost-perfect market. We have launched our own card scheme called RuPay with the help of National Payments Corporation of India (NPCI).

Sarthak Jain (15BBL016) said...

As we do today discussed in the class that what do we mean my large when it comes to large number of buyers and sellers in a perfect competition. So in my opinion ,large number implies
that each firm is very small in comparison to the
total market and if one firm has to become significantly
large it would dominate the market and competition would be
eliminated or at least diminished.

Unknown said...

Credit cards market is flourishing one reason is there flexibility in dealing with the worldwide transactions whether you have money in your account or not you can fulfill your desires to a great extent ,but this laxity is also because it is actually helping the credit card firms to prosper with huge usage. Hence we can say both the market and buyers of the desired product compliment each other to let the. Flow of economy to grow.

Unknown said...

Credit card market resembles a perfectly competitive market.But question arises whether the banks who are providing these cards also thinks that they are in a perfectly competitive market? Because in these market the advertising of products is just a waste because it will not influence the market instead of it we can see a lot of advertisement and promotions they do to influence the market by influencing the mindset of the buyers,in case of India these promotions obviously works because here more you highlight your product,more the chances of your product will increase .So its true that credit card is a perfectly competitive market but up to what level if not in the world but what in India??

Anukrati Mishra said...

Credit card companies are the example of perfectly competitive market as no single buyer or seller influences the market. There are many sellers and buyers are even greater in number. Because of Advertising, certain company might get an edge over the other co. but it doesn't completely throw out the other co. in the credit industry.Advertising doesnt create a monopolistic situation so credit industries will still be called the perfectly competitive market even if certain co. Are advertising their cards.

15bal105

Anonymous said...

Credit card companies can easily allure the consumers to purchase unnecessary items. The facility to buy a good without worrying about the cash tends to hamper the prudency of a person. This ultimately results in making a purchase beyond the budget. The credit card scheme has an extremely high tendency to bring down the savings of a person.
15BAL099

Anonymous said...

as you have mentioned that this is a perfect competition,why cant this be a oligopoly market? 1) as we know that the major market share of the credit card market is shared by few sellers and major thing is
2) the product can be differentiated by the payment gateway they were offered like master card or visa card.
3)considering the natural barrier the company needs to have high capital to enter in to the credit card market.

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