Ebook To Switch Or Not To Switch: An Examination of Consumer Behavior in the Credit Card Industry
The credit card and credit lending industry is one of the most competitive financial industries in the United States. In this industry we see a paradox between supply and competition. One could expect that competition would be abundant because many firms compete in this market. Ironically, even though competition is intense, the industry fails to offer consumers the traditional benefits arising from competition. These benefits are: low price, market incentives to switch and “sweeteners” such as lower rates, and other perks associated with credit cards.
Credit card companies compete in two different markets, a primary market and a secondary market. The primary market is the first level of competition within the industry; it is where consumers first come into the market seeking credit. It is at this level that firms vie for first-time customers. Since most people need to establish credit and since there is an abundance of banks and credit companies, the supply is elastic. Credit firms as well as commercial banks are more than willing to offer consumers lines of credit. For instance, the firms frequently visit various college and university campuses to solicit under-employed full-time students. These firms do this fully cognizant that these students are at a high risk of default.
Financial institutions also send out mailings to almost every household in the country with offers of credit. Because credit is so easy to obtain, this paper will not focus on the elasticity of supply. Instead, this paper investigates why people chose to switch credit cards within the secondary market. Consequently, the secondary market level of competition is defined here to be the level where credit card issuers and commercial banks compete for each other’s existing customers. The target consumers at this level of competition are established customers with balances on their credit cards. Consumers at this level have a certain degree of brand loyalty. Since competition at this level is basically centered on established customers, the market base contains fewer people.
This paper also explores the reasons why people switch credit cards. Specifically interest rates, fees and card balances, and perks such as frequent flier miles and shopping discounts. The market structure that makes up this vast credit card and credit lending industry will also be discussed. In addition, a correlation will be established showing a link between consumer opinion towards the credit card industry and the fierce competition between rival firms and commercial banks. Finally, a logit regression model will be used to predict consumer behavior and why the participants would switch to other credit cards. It is expected that balance and interest rates have the greatest influence on why consumers switch credit cards. The results should also show some relationship as to why people switch and whether or not they carry a balance from month to month.
Posted in :
