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Efficiency and Competition between Payment Instruments

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Author Info
Joseph Farrell () (University of California, Berkeley)

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Abstract

A payment instrument that disproportionately charges merchants (as with high interchange) can take business from others that offer the two-sided customer better deals. This competitive bias arises because merchants internalize cardholders' benefits (even without merchant competition). Use of an instrument with high merchant fees also raises prices paid by other consumers, a non-pecuniary externality. While it can be allocatively efficient to tax rivals of a firm (or cooperative) with market power, competition policy urges otherwise. The competitive bias and the externality on other consumers vanish when competing payment instruments are equally costly to merchants, suggesting a simple policy benchmark.

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

Volume (Year): 5 (2006)
Issue (Month): 1 (March)
Pages: 26-44
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Handle: RePEc:rne:rneart:v:5:y:2006:i:1:p:26-44

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Related research
Keywords: Interchange fees; credit cards; merchant internalization; competition policy;

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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. Jean-Charles Rochet & Jean Tirole, 2006. "Externalities and Regulation in Card Payment Systems," Review of Network Economics, Concept Economics, vol. 5(1), pages 1-14, March. [Downloadable!]
  2. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Blackwell Publishing, vol. 52(1), pages 1-26, 03. [Downloadable!] (restricted)
    Other versions:
  3. Jean-Charles Rochet, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, Concept Economics, vol. 2(2), pages 97-124, June. [Downloadable!]
  4. Howard Chang & David S. Evans & Daniel D. Garcia Swartz, 2005. "The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia," Review of Network Economics, Concept Economics, vol. 4(4), pages 328-358, December. [Downloadable!]
  5. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  6. 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.
  7. Borenstein, Severin, 1996. "Settling for Coupons: Discount Contracts as Compensation and Punishment in Antitrust Lawsuits," Journal of Law & Economics, University of Chicago Press, vol. 39(2), pages 379-404, October.
    Other versions:
  8. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics. [Downloadable!]
  9. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August. [Downloadable!] (restricted)
  10. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September. [Downloadable!] (restricted)
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. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. 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:
  4. 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!]
  5. 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!]
  6. Jean-Charles Rochet & Jean Tirole, 2006. "Externalities and Regulation in Card Payment Systems," Review of Network Economics, Concept Economics, vol. 5(1), pages 1-14, March. [Downloadable!]
  7. 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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