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?

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.