During recessions and economic hard times, many people-particularly those who have difficulty getting bank loans-turn to pawnshops to raise cash. But even during boom years, pawnshops can be profitable. Because the collateral that customers put up (such as jewelry, guns, or electric guitars) is generally worth at least double what is lent, it generally can be sold at a profit. And because usury laws allow higher interest ceilings for pawnshops than for other lending institutions, pawnshops often charge spectacularly high rates of interest. For example, Florida's pawnshops charge interest rates of 20% or more per month. According to Steven Kent, an analyst at Goldman, Sachs, pawnshops make 20% gross profit on defaulted loans and 205% interest on loans repaid.
a. In 2012 there were about 15,000 pawnshops in the United States. This was much higher than in 2007, when the number was about 12,000. Why did the number increase?
b. In a particular small city, do the pawnshops constitute a perfectly competitive industry? If not, what is the market structure of the industry?
c. Are there considerable barriers to entry in the pawnshop industry? (A pawnshop can be opened for less than $250,000, but a number of states have tightened licensing requirements for pawnshops.)