Oligopoly with asymmetric information: differentiation in credit markets

We study an oligopoly model with asymmetric information and product differe ntiation The analysis focuses on credit markets, We assume information to b e asymmetric with respect to customer characteristics that directly affect bank profits, We analyze the impact of horizontal differentiation, which se rves as an index for the degree of competition among banks, on loan-grantin g practices. We show that with more differentiation (less competition), ban ks may screen credit applicants less intensively in equilibrium because the y compete less aggressively for the most profitable customers. As a result, welfare may actually increase as competition becomes less intense. Total p rofits may either increase or decrease with the introduction of asymmetric information.