Why wouldn't competition prevent "usurious" payday loan rates? The current Wiki page on "Payday Loans" claims loans are priced above marginal cost. The justification is that


  If a lender chooses to innovate and reduce cost to borrowers in order to secure a larger share of the market, the competing lenders will instantly do the same, negating the effect. For this reason, among others, all lenders in the payday marketplace charge at or very near the maximum fees and rates allowed by local law. [23]


Doesn't this logic contradict the fact that competitive markets price goods at their marginal cost?

Is there an implicit assumption that the payday loan market is not sufficiently competitive? If so, is this assumption true?
The posted quote is economic nonsense.


  If a lender chooses to innovate and reduce cost to borrowers in order to secure a larger share of the market, the competing lenders will instantly do the same, negating the effect.


This applies to any industry without intellectual property protection -- it is hardly unique to the payday loan industry. By this logic, we'd expect to encounter massive price gouging across dozens of industries.

Besides, if payday loan innovation is in the form of software that better predicts default (the most likely path), it will be protected under copyright law and potentially software patents. And while business model innovations are not patentable, there's still a first mover advantage.

The payday loan business is not highly profitable.

Profit margins of payday-loan corporations are publicly available, and lower than most other industries. One study found that "despite the common belief, payday lending firms do not always make extraordinary profits. In fact, when compared to many other well-known lending institutions, payday lenders may fall far short in terms of profitability."

This is not surprsing, since the payday loan market is highly saturated, which suggests substantial competition.

"Usurious" APR rates are misleading.

A typical payday loan charges \$17 for a two-week \$100 loan.
Expressed as an annualized rate, this is an "outrageous" 390% APR.
But the loan's short-term nature means transaction costs will likely prevent a large profit.
(The source of this information is potentially biased. Be sure to read critically.)