Abstract
This paper models a consumer loan market with a vertical structure where an upstream monopolist supplies funds to downstream nonbanks. The nonbanks supply funds to consumers in the consumer loans market. An inverse demand function of the consumer is linear. The downstream nonbank freely enters the market as long as it earns a positive profit. First, this paper derives free-entry equilibrium without government regulation. Next, this paper examines the effects of government regulation on the entry of nonbanks. Two regulatory schemes are investigated: partial regulation, wherein the government can only control the interest rate the monopolist sets, and full regulation, wherein the government can control the number of nonbanks as well as the interest rate. This paper presents four new results. First, downstream firms insufficiently enter the market under partial regulation. Second, downstream firms excessively enter the market under full regulation. Third, the establishment of the upstream public firm improves welfare even though its profit is negative under partial regulation. Fourth, full regulation is welfare improving compared to partial regulation.
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Notes
For literatures concerning privatization, see De Fraja and Delbono (1989, 1990), Yoshino and Fujita (1996) for banking sector, Anderson et.al. (1997), Matsumura (1998). Matsumura and Kanda (2005) considered the long-run effect of mixed oligopoly. Von Weizsäcker (1980), Mankiw and Whinston (1986), Suzumura and Kiyono (1987), and Ohkawa et al. (2005) investigated whether the long-run equilibrium number of firms in the oligopoly market is excessive or insufficient from the social-welfare viewpoint.
The number of financial institutions in this long-run equilibrium is less than that in the second-best equilibrium when the government can only control the number of the nonbanks. The insufficient-entry theorem is valid according to unpublished work.
\( \frac{\partial^2W}{{{\partial r}_B}^2}=\frac{-{N}^2}{{\left(N+1\right)}^2}<0 \). The second-order condition of maximization is satisfied.
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Mori, N., Okamura, M. & Ohkawa, T. Economic Regulation in the Consumer Loans Market. Atl Econ J 48, 447–459 (2020). https://doi.org/10.1007/s11293-020-09685-z
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DOI: https://doi.org/10.1007/s11293-020-09685-z
Keywords
- Consumer loan market
- Vertical structure
- Partial regulation
- Full regulation
- Insufficient entry theorem
- Welfare improving public firm with loss