We examine how a public financial institution (public bank) influences
the long-run equilibrium in the consumer loan market consisting of private
non-banks. To this end, we develop a successive oligopoly model: An upstream
firm is the public bank which maximizes an economic welfare, while downstream
firms are the private profit-maximizing non-banks. The public bank finances
the private non-banks in the upstream market. The private non-banks make
a loan to the individual consumers in the downstream market. In the long-run
equilibrium, the private non-banks in the downstream market can earn zero
profit. Our model is classified as the mixed oligopoly with vertical market
structure.
As a bench mark case, we first derive the long-run equilibrium when the
upstream firm is a private bank that maximizes its profit. In this case,
the private non-banks enter the downstream market insufficiently from the
standpoint of social wefare. We show, on the other hand, that the non-banks
excessively enter the downstream market when they face the public bank
in the upstream market. The potential entrants (non-banks) in the downstream
market can earn more profit when the public bank exists than when all financial
institutions are private ones. Note that the large number of private non-banks
in the mixed oligopoly is welfare deteriorating because more non-banks
require the larger sum of their fixed cost as each one has the same fixed
cost.
We finally compare the resulting welfare of the mixed oligopoly with that
of the benchmark case. We show that the mixed oligopoly is superior to
the benchmark case from the standpoint of social welfare. Our result implies
that an establishment of a public financial institution in the upstream
market has an economics rationale.
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