Cost efficiency in the retail payment networks: first evidence from the Italian credit card system
AbstractIn this paper, a parametric cost frontier for the credit card market is specified (Â“stochastic frontier approachÂ” - SFA) and robustness checks of the main results are performed. The aim is to provide some clues to: the x-inefficiency problem and determinants in a retail payment circuit; the main technical characteristics of the industry (i.e. scale economies, cost structure, factor substitution); policy implications. The Italian case study indicates that: the credit card industry could benefit from significant increasing returns to scale, but bigger the network (in terms of transactions handled) the more intermediaries tend to veer away from their efficient cost frontier. Moreover, the cost structure borne by firms is strongly dependent on intra-network agreements. Possible solutions to the x-inefficiency problem might come from the Â“theory of incentivesÂ”, which provides pricing (or cost recovery) mechanisms computed on the basis of costs expected under efficiency conditions; however, more studies are needed to investigate the topic within the context of Â“selfregulatedÂ” payment networks.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 480.
Date of creation: Jun 2003
Date of revision:
credit card industry; interchange fees; technology; efficiency; cost frontier;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- G2 - Financial Economics - - Financial Institutions and Services
- L8 - Industrial Organization - - Industry Studies: Services
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.:
- Paul W. Bauer & Diana Hancock, 1995. "Scale economies and technological change in Federal Reserve ACH payment processing," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 14-29.
- Philippe Gagnepain & Marc Ivaldi, 2002.
"Stochastic Frontiers and Asymmetric Information Models,"
- Philippe Gagnepain & Marc Ivaldi, 2002. "Stochastic Frontiers and Asymmetric Information Models," Journal of Productivity Analysis, Springer, vol. 18(2), pages 145-159, September.
- Gagnepain, P. & Ivaldi, M., 1998. "Stochastic Frontiers and Asymmetric Information Models," Papers 98.503, Toulouse - GREMAQ.
- Humphrey, David Burras, 1981. "Economies to scale in federal reserve check processing operations," Journal of Econometrics, Elsevier, vol. 15(1), pages 155-173, January.
- Kulasekaran, Sivakumar & Shaffer, Sherrill, 2002. "Cost efficiency among credit card banks," Journal of Economics and Business, Elsevier, vol. 54(6), pages 595-614.
- William C. Horrace & Peter Schmidt, 2002. "Confidence Statements for Efficiency Estimates from Stochastic Frontier Models," Econometrics 0206006, EconWPA.
- Walker, David A., 1978. "Economies of scale in electronic funds transfer systems," Journal of Banking & Finance, Elsevier, vol. 2(1), pages 65-78, June.
- THIRY, Bernard & TULKENS, Henry, 1988. "Allowing for technical inefficiency in parametric estimates of production functions with an application to urban transit firms," CORE Discussion Papers 1988041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
- Massimiliano Piacenza, 2002. "Regulatory Constraints and Cost Efficiency of the Italian Public Transit Systems: An Exploratory Stochastic Frontier Model," CERIS Working Paper 200202, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
- Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-88, September.
- Schmidt, Peter, 1976. "On the Statistical Estimation of Parametric Frontier Production Functions," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 238-39, May.
- Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998.
"The consolidation of the financial services industry: causes, consequences, and implications for the future,"
Finance and Economics Discussion Series
1998-46, Board of Governors of the Federal Reserve System (U.S.).
- Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
- Paul W. Bauer & Gary D. Ferrier, 1996.
"Scale economies, cost efficiencies, and technological change in Federal Reserve payments processing,"
Board of Governors of the Federal Reserve System (U.S.), pages 1004-1044.
- Bauer, Paul W & Ferrier, Gary D, 1996. "Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1004-39, November.
- Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
- Paolo Angelini & Paolo Del Giovane & Stefano Siviero & Daniele Terlizzese, 2002. "Monetary Policy Rules for the Euro Area: What Role for National Information?," Temi di discussione (Economic working papers) 457, Bank of Italy, Economic Research and International Relations Area.
- Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
- Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
- DeYoung, Robert, 1996. "Comment on Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1040-44, November.
- Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 1993. "The Measurement of Productive Efficiency: Techniques and Applications," OUP Catalogue, Oxford University Press, number 9780195072181, September.
- Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
- David B. Humphrey, 1994. "Delivering deposit services: ATMs versus branches," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 59-81.
- Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211.
- Francesco Zollino, 2004. "Social mobility and endogenous cycles in redistribution," Temi di discussione (Economic working papers) 505, Bank of Italy, Economic Research and International Relations Area.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.