Better with buy now, pay later?: A competitive analysis

In this paper, we study the incentives of vertically differentiated firms to offer Buy Now, Pay Later (BNPL) in a competitive market. BNPL is a relatively new payment mechanism which, at the point of sale, allows consumers to pay for a product in interest-free installments spread out over a few weeks/months. For a monopolist, offering BNPL is essentially about expanding the market by offering financing to the consumers who cannot afford its product. Therefore, a monopolist is always better-off providing BNPL to its consumers. However, in a competitive environment, offering BNPL is a more complex strategic decision because retailers also need to consider strategic reactions from their competitors. We find that in a competitive situation either of the two retailers might refrain from offering BNPL. This is because when one retailer offers BNPL, the other firm not offering BNPL also benefits from competitive spillovers. Although a monopolist's benefits from offering BNPL increases in its product quality, in a competitive environment, holding all else constant, a low-quality firm might have more to gain from offering BNPL. In addition to asymmetric equilibria, we also find that there is a symmetric equilibrium in which both retailers offer BNPL. In view of public concerns about possible negative impact of BNPL on consumers, we also study how BNPL consumers' ignoring the cost of using BNPL can adversely affect them. We find that underestimation of these costs lowers consumers' welfare, and this reduction in welfare stems from three different sources - (i) higher product prices, (ii) excessive purchase, and (ii) excessive upgrades to the higher quality product.