Product Differentiation and Consumer Surplus in the Microfinance Industry

Abstract

Abstract During the last 15 years, high repayment rates of up to 96% have drawn many new lending institutions to the microfinance industry. While a decade ago, the industry was dominated primarily by monopolies ostensibly focused on social welfare, the current market is filled with various types of financial institutions offering a variety of lending arrangements. The goal of this article is to capture the degree to which consumers have benefitted from these structural changes within the microfinance industry. Using a Bertrand differentiated product framework, we model the price setting and demand functions of Microfinance Institutions (MFIs). With a 7 year panel data set covering over 70 countries, we empirically estimate parameters of the Nash price equilibrium and simulate the shape and structure of the underlying demand equation. We use simulated demand parameters to derive and compare measures of consumers’ surplus across regions and countries. Our research indicates that growth in the MFI industry has brought about declines in market concentration, and furthermore that each 0.01 unit change in the Hirschman–Herfindahl index correlates with a 2% increase in consumers’ surplus.