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Impact of Direct Regulations on the Korean Credit Card Market and Consumer Welfare(Vol.7 No.1)

연구조정실 2004.08.10 9701

Impact of Direct Regulations on the Korean Credit Card Market and Consumer Welfare(Vol.7 No.1)  

Seong-Hun Yun
:Advisory economist, International Economics Team, Institute for Monetary and Economic Research, the Bank of Korea (

  The Korean credit card market grew dramatically in scale from 1998, due to a variety of incentives and tax breaks offered by the government. This enhanced the transparency of transactions as well as sparking an economic recovery by boosting domestic consumption. However, it also generated some malign effects. First is that of the number of defaulters on credit card loans in response to ill-considered cash advances granted in the credit card market. Second, credit card firms enjoy oligopolistic market power, allowing them to leave credit card interest rates unchanged at high levels despite falls in market interest rates.
  The government tackled these problems directly by, for example, imposing regulations on their operations and pricing, forcing credit card firms to cut the share of their cash advances and to lower credit card interest rates, while keeping entry barriers in place. However, given the inefficient cost structure of the credit card industry, whose fixed costs are huge, entry barriers can be abused by credit card firms to maintain the oligopoly structure by creating excess competition. This was the major culprit in the reckless issuance of plastic money by credit card firms and the massive rise in the number of credit defaulters. In addition, regulations on operations and pricing may well decrease not only the profitability of credit card firms but also the consumer welfare of credit card holders through an adverse selection problem.

JEL Classification Number: D82, G21

Key words: adverse selection problem, excess competition, entry barriers, consumer welfare, direct regulations 

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