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Consumer Choice and Merchant Acceptance of Payment Media

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Author Info

  • Wilko Bolt
  • Sujit Chakravorti

Abstract

We study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks| income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the bank's profit-maximizing price structure.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 197.

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Date of creation: Dec 2008
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Handle: RePEc:dnb:dnbwpp:197

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Related research

Keywords: Retail Financial Services; Network Effects; Social Welfare; Multihoming; Payment Card Networks;

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References

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  1. Sujit Chakravorti & Roberto Roson, 2004. "Platform competition in two-sided markets: the case of payment networks," Working Paper Series WP-04-09, Federal Reserve Bank of Chicago.
  2. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  3. 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.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  6. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
  7. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  8. Humphrey, David B., 2004. "Replacement of cash by cards in US consumer payments," Journal of Economics and Business, Elsevier, vol. 56(3), pages 211-225.
  9. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
  10. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  11. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
  12. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  13. Terri Bradford, 2008. "Developments in interchange fees in the United States and abroad," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Apr.
  14. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  15. Bolt, Wilko & Tieman, Alexander F., 2008. "Heavily skewed pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1250-1255, September.
  16. Benjamin E. Hermalin & Michael L. Katz, 2004. "Sender or Receiver: Who Should Pay to Exchange an Electronic Message?," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 423-447, Autumn.
  17. JOHN M. Barron & MICHAEL E. Staten & JOHN Umbeck, 1992. "Discounts For Cash In Retail Gasoline Marketing," Contemporary Economic Policy, Western Economic Association International, vol. 10(4), pages 89-102, October.
  18. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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  1. Credit card payment fees need regulation
    by Economic Logician in Economic Logic on 2009-02-02 14:23:00
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