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Efficient Pricing of Large Value Interbank Payment Systems

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  • Holthausen, Cornelia
  • Rochet, Jean-Charles

Abstract

This paper studies the pricing of large-value payment systems and its influence on the way commercial banks route their payments. It is shown that the optimal pricing scheme for a public monopoly system involves quantity discounts in the form of a decreasing marginal fee. This is also true when the public system competes with a private system characterized by a lower marginal cost. However in this case, optimal marginal fees in the public system are lower than its marginal cost, and fixed fees have to be levied. We show that if the Central Bank wants the public system to be used by a significant proportion of the banks, this may be incompatible with full cost recovery. We also study the case of competition between several public systems. The structure of the optimal tariff depends on the willingness of Central Banks to allow by-pass.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0093
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 7 (October)
Pages: 1797-1818

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:7:p:1797-1818

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Freixas, Xavier & Parigi, Bruno, 1998. "Contagion and Efficiency in Gross and Net Interbank Payment Systems," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 3-31, January.
  2. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November.
  3. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  4. Furfine, Craig H & Stehm, Jeff, 1998. "Analyzing Alternative Intraday Credit Policies in Real-Time Gross Settlement Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 832-48, November.
  5. Charles M. Kahn & William Roberds, 1996. "Payment system settlement and bank incentives," Working Paper 96-10, Federal Reserve Bank of Atlanta.
  6. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  7. Gasmi, F. & Laffont, J. J. & Sharkey, W. W., 2000. "Competition, universal service and telecommunications policy in developing countries," Information Economics and Policy, Elsevier, vol. 12(3), pages 221-248, September.
  8. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  9. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
  10. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509.
  11. Hancock, Diana & Humphrey, David B. & Wilcox, James A., 1999. "Cost reductions in electronic payments: The roles of consolidation, economies of scale, and technical change," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 391-421, February.
  12. David Vanhoose, 2000. "Central bank policy making in competing payment systems," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(2), pages 117-139, June.
  13. Holthausen, Cornelia & Rønde, Thomas, 2000. "Regulating access to international large-value payment systems," Working Paper Series 0022, European Central Bank.
  14. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
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Cited by:
  1. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada.
  2. Nilssen,T., 2000. "Risk externalities in a payments oligopoly," Memorandum 10/2000, Oslo University, Department of Economics.
  3. Craig, Ben & Fecht, Falko, 2011. "Substitution between net and gross settlement systems: A concern for financial stability?," Discussion Paper Series 1: Economic Studies 2011,16, Deutsche Bundesbank, Research Centre.
  4. Wilko Bolt & David B. Humphrey, 2005. "Public Good Aspects of TARGET: Natural Monopoly, Scale Economies, and Cost Allocation," DNB Working Papers 036, Netherlands Central Bank, Research Department.
  5. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
  6. Bolt, Wilko & Humphrey, David, 2005. "Public good issues in TARGET: natural monopoly, scale economies, network effects and cost allocation," Working Paper Series 0505, European Central Bank.

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