Case Number: 5-204-252, Year Published: 2004, Revision Date: January 01, 0001
HBS Number: KEL005
Pricing, Credit Cards, Selection Bias
The case describes market experiments conducted by a major credit card issuer. In a typical experiment, the issuer sends out hundreds of thousands of solicitations based on information received from credit reporting agencies (e.g. credit score, past delinquencies, etc.). Selection bias is striking: the average risk profile of those responding to higher interest rates is significantly worse than that of respondents to lower rates. Tracking respondents for 27 months after the experiment, respondents to higher rates displayed significantly higher delinquency and bankruptcy rates. This short case is based on an excellent research paper by Larry Ausubel who obtained proprietary data on the condition of not revealing the name of the issuer. Contact Professor Al-Najjar for teaching methods, slides, and classroom exhibits.
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