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The Theory of Interchange Fees: A Synthesis of Recent Contributions

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Author Info
Jean-Charles Rochet () (Toulouse University, IDEI and GREMAQ)

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Abstract

We synthesize the results of the recent theoretical literature on the determination of interchange fees by payment card associations. We analyze in particular the conditions under which these interchange fees are excessively high, as compared with social optimum. These conditions involve several parameters: the intensity of competition between banks and between merchants; the elasticities of demand on both sides of the market, as well as the degrees of heterogeneity among merchants and among cardholders. A crucial element is the competitive edge that merchants can gain by accepting cards.

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Publisher Info
Article provided by Concept Economics in its journal Review of Network Economics.

Volume (Year): 2 (2003)
Issue (Month): 2 (June)
Pages: 97-124
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Handle: RePEc:rne:rneart:v:2:y:2003:i:2:p:97-124

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Related research
Keywords: Payment networks; interchange fees; banks; survey;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. repec:bep:eaptop:v:3:y:2003:i:1:p:1069-1069 is not listed on IDEAS
  2. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  4. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  5. Hausman, Jerry A & Leonard, Gregory K & Tirole, Jean, 2003. " On Nonexclusive Membership in Competing Joint Ventures," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 43-62, Spring.
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  6. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Blackwell Publishing, vol. 50(2), pages 103-22, June. [Downloadable!] (restricted)
    Other versions:
  7. Matutes, Carmen & Padilla, A. Jorge, 1994. "Shared ATM networks and banking competition," European Economic Review, Elsevier, vol. 38(5), pages 1113-1138, May. [Downloadable!] (restricted)
  8. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June. [Downloadable!] (restricted)
  9. Sujit Chakravorti & Alpa Shah, 2001. "A study of the interrelated bilateral transactions in credit card networks," Occasional Paper; Emerging Payments EPS-2001-2, Federal Reserve Bank of Chicago. [Downloadable!]
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  10. James J. McAndrews, 1996. "Retail pricing of ATM network services," Working Papers 96-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
  11. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  12. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago. [Downloadable!]
  13. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics. [Downloadable!]
  14. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June. [Downloadable!] (restricted)
  15. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August. [Downloadable!] (restricted)
  16. Donald I. Baker, 1995. "Shared ATM networks - the antitrust dimension," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 5-17. [Downloadable!]
  17. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August. [Downloadable!] (restricted)
  18. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA. [Downloadable!]
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  19. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA. [Downloadable!]
    Other versions:
  20. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September. [Downloadable!] (restricted)
  21. McAndrews, James J. & Rob, Rafael, 1996. "Shared ownership and pricing in a network switch," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 727-745, October. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wilko Bolt & Alexander F. Tieman, 2006. "Social Welfare and Cost Recovery in Two-Sided Markets," Review of Network Economics, Concept Economics, vol. 5(1), pages 103-117, March. [Downloadable!]
    Other versions:
  2. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department. [Downloadable!]
  3. Verdier, Marianne, 2006. "Retail Payment Systems: What can we Learn from Two-Sided Markets?," MPRA Paper 2606, University Library of Munich, Germany. [Downloadable!]
  4. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  5. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of Payment Cards: A Status Report," DNB Working Papers 193, Netherlands Central Bank, Research Department. [Downloadable!]
  6. Marius Schwartz & Daniel R. Vincent, 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, Concept Economics, vol. 5(1), pages 72-102, March. [Downloadable!]
  7. James McAndrews & Zhu Wang, 2008. "The economics of two-sided payment card markets: pricing, adoption and usage," Research Working Paper RWP 08-12, Federal Reserve Bank of Kansas City. [Downloadable!]
  8. Robert M. Hunt, 2003. "An introduction to the economics of payment card networks," Working Papers 03-10, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  9. Daniel D. Garcia-Swartz & Robert W. Hahn & Anne Layne-Farrar, 2006. "The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics," Review of Network Economics, Concept Economics, vol. 5(2), pages 175-198, June. [Downloadable!]
  10. Stuart E. Weiner & Julian Wright, 2005. "Interchange Fees in Various Countries: Developments and Determinants," Review of Network Economics, Concept Economics, vol. 4(4), pages 290-323, December. [Downloadable!]
    Other versions:
  11. Michael L. Katz, 2005. "What do we know about interchange fees and what does it mean for public policy? : commentary on Evans and Schmalensee," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 121-137. [Downloadable!]
  12. Joseph Farrell, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, Concept Economics, vol. 5(1), pages 26-44, March. [Downloadable!]
  13. Rochet, Jean-Charles & Tirole, Jean, 2008. "Must-Take Cards: Merchant Discounts and Avoided Costs," IDEI Working Papers 496, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  14. David S. Evans, 2003. "Some Empirical Aspects of Multi-Sided Platform Industries," Review of Network Economics, Concept Economics, vol. 2(3), pages 191-209, September. [Downloadable!]
  15. Alan S. Frankel, 2005. "Interchange fees in various countries : developments and determinants : commentary on Weiner and Wright," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 51-64. [Downloadable!]
  16. Eric Emch & T. Scott Thompson & Bates White, LLC, 2006. "Market Definition and Market Power in Payment Card Networks," Review of Network Economics, Concept Economics, vol. 5(1), pages 45-60, March. [Downloadable!]
  17. Zhu Wang, 2006. "Market structure and credit card pricing: what drives the interchange?," Payments System Research Working Paper PSR WP 06-04, Federal Reserve Bank of Kansas City. [Downloadable!]
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This page was last updated on 2009-11-16.

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