Price Dispersion on Payday Loan Market in Finland, a Descriptive Study

Abstract

This thesis aims to enlighten, why there exists intense price dispersion on payday loans market in Finland, even though payday loans can be seen as a homogeneous goods. The dispersion is observed on one period between firms and is made apparent by calculating annual percentage rates for loans with different sizes and different payback times. After that the dispersion is first reflected against literature, that covers price dispersion in settings, where consumer is faced with search costs and when she suffers from biases, that lead to consistent failure in optimization. Due to the search cost consumers might search too little and this allows firms to charge higher than competitive prices, whereas behavioral issues expose consumers to pay too much, when they do not have realistic expectations for example on their future demand. Second, dispersion is covered in the light of credit screening literature, that suggests when firms screen out risky consumers based on different criterion, they naturally set rates to cover for the risk that they engage in. It is also showed, that the sales of firms are dispersed, which following the standard industrial organizations theory would suggest, that the firms do not have equal costs. Taking account Finnish collective labor agreements operational costs might be close to equal, but on the other hand the borrowing costs of firms might differ.