Answer to Question #289082 in Microeconomics for ram

Question

Study the given case carefully and answer the questions asked at the end.

In 1997, over $70,0000 million purchases were charged on credit cards, and this total is increasing at a rate of over 10 percent per year. At first glance, the credit card market would seem to be a rather concentrated industry. Visa, Master Card, and American Express are the most familiar names and over 60 percent of all charges are made using one of these three cards. But on closer examination, the industry seems to exhibit most of the characteristics of perfect competition.

a.      What type of market is the American credit card market? And why? Explain. (10 Marks)

Do you believe that a new firm in the industry finds a difficulty to enter? Why? Give reasons.

Answer 1

a)The American credit card market could be seen as a perfectly competitive market.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 credit union in Los Angeles, while a next door neighbor may have acquired hers from a Miami Bank when she was living in Florida. Credit cards 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. Thus this marks the characteristics of a perfect competition.

b) A new firm will find it difficult to enter

Businesses and consumers who wish to use American Express or Discover cards must apply for these cards separately, and they must be offered incentives to take this step such as rewards programs or small discounts for frequent purchases. Furthermore, these companies' cards are not connected to any bank account so they are only credit cards.Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity,