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Public Good Aspects of TARGET: Natural Monopoly, Scale Economies, and Cost Allocation

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Author Info
Wilko Bolt
David B. Humphrey

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Abstract

This paper discusses various theoretic concepts which play a role in assessing the public benefits of Target, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. Based on empirical results for the Federal Reserve's payment system (Fedwire), it is argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs. The main thrust of the paper concerns natural monopoly and the possibility of lowering unit payment processing cost via economies of scale. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the `most efficient scale' or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing (i.e., pricing at less than full current cost). When the lower costs are realized, the subsidy would be removed and full cost pricing implemented. Once users face the full costs of their payment decisions, they are better able to match benefits with actual costs and implement a more efficient allocation of payment resources than occurs today on Target.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 036.

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Date of creation: Apr 2005
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Handle: RePEc:dnb:dnbwpp:036

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Related research
Keywords: public good natural monopoly most efficient scale partial subsidy

Find related papers by JEL classification:
G20 - Financial Economics - - Financial Institutions and Services - - - General
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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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. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July. [Downloadable!] (restricted)
  2. Wilko Bolt & Alexander F. Tieman, 2003. "Pricing Debit Card Payment Services: An IO Approach," IMF Working Papers 03/202, International Monetary Fund. [Downloadable!]
    Other versions:
  3. 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:
  4. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  5. Robin Mason & Tommaso M. Valletti, 2001. "Competition in Communication Networks: Pricing and Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 17(3), pages 389-415.
  6. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25. [Downloadable!]
  7. Robert M. Adams & Paul W. Bauer & Robin C. Sickles, 2002. "Scope and scale economies in Federal Reserve payment processing," Working Paper 0213, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. Humphrey, David B. & Keppler, Robert H. & Montes-Negret, Fernando, 1997. "Cost recovery and pricing of payment services," Policy Research Working Paper Series 1833, The World Bank. [Downloadable!]
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