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Adoption of a new payment method: Experimental evidence

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  • Arifovic, Jasmina
  • Duffy, John
  • Jiang, Janet Hua

Abstract

We develop a framework for studying the introduction of a new payment method in a controlled laboratory environment, where consumers (buyers) and merchants (sellers) can learn to coordinate their adoption decisions over time. The underlying game exhibits network adoption effects as emphasized by the theoretical literature. We elicit players’ beliefs about the adoption decisions of the other side of the market so that we can directly test for network effects. We investigate how the additional fixed cost of adopting the new payment method, relative to its savings on per transaction costs, affects merchant’s decisions to adopt the new payment method and how that in turn affects buyer’s adoption decisions. We find that a low fixed cost favors quick adoption of the new payment method by all participants, while for a sufficiently high fixed cost, merchants gradually learn to reject the new payment method. We also find strong evidence of network effects and that the fixed costs are important for the strong response of seller acceptance decisions to buyer adoption decisions. An evolutionary learning model provides a good characterization of the dynamic adjustment paths found in our experimental data.

Suggested Citation

  • Arifovic, Jasmina & Duffy, John & Jiang, Janet Hua, 2023. "Adoption of a new payment method: Experimental evidence," European Economic Review, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000399
    DOI: 10.1016/j.euroecorev.2023.104410
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    More about this item

    Keywords

    Payment methods; Payment adoption; Network effects; Two-sided markets; Coordination problems; Experimental economics; Evolutionary learning;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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