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Pricing Debit Card Payments Services: An IO approach

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Author Info

  • W. Bolt
  • A.F. Tieman

Abstract

In this paper we present a theoretic framework to analyse pricing structures in debit card schemes. Card-holders value debit cards only to the extent that these are accepted by retailers, while retailers in turn benefit from a widespread usage of cards. This points to the two-sided nature of the market for debit cards. In setting its prices, the network routing switch, which in our model controls the electronic debit card network and is jointly owned by the banks, needs to consider getting both the consumers' side and retailers' side on board. We show that the 'double-monopolistic' network routing switch may want to supply consumers with cheap debit cards, deriving profits from charging a high retailer fee per trans-action. This theoretic result resembles the current practice in the Netherlands where consumers pay no transaction fee for using their debit cards. Only the retailers pay such a fee. Interestingly, this 'corner' solution carries over when analysing socially optimal prices.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 735.

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Date of creation: 2003
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Handle: RePEc:dnb:wormem:735

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Keywords: Debit card payment systems; two-sided monopolistic pricing; social optimum;

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References

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  1. 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.
  2. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
  3. 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.
  4. David Humphrey & Lawrence Pulley & Jukka Vesala, 2000. "The Check's in the Mail: Why the United States Lags in the Adoption of Cost-Saving Electronic Payments," Journal of Financial Services Research, Springer, vol. 17(1), pages 17-39, February.
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Citations

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Cited by:
  1. Wilko Bolt & Alexander F. Tieman, 2005. "Social Welfare and Cost Recovery in Two-Sided Markets," IMF Working Papers 05/194, International Monetary Fund.
  2. Hans Brits & Carlo Winder, 2005. "Payments are no free lunch," DNB Occasional Studies 302, Netherlands Central Bank, Research Department.
  3. Bergman, Mats A., 2005. "A Welfare Ranking of Two-Sided Market Regimes," Working Paper Series 185, Sveriges Riksbank (Central Bank of Sweden), revised 01 Sep 2005.
  4. Bolt, Wilko & Humphrey, David, 2005. "Public good issues in TARGET: natural monopoly, scale economies, network effects and cost allocation," Working Paper Series 0505, European Central Bank.
  5. Hayashi Fumiko, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
  6. 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.
  7. Guibourg, Gabriela & Segendorff, Bjorn, 2007. "A note on the price- and cost structure of retail payment services in the Swedish banking sector 2002," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2817-2827, September.
  8. Wilko Bolt & Alexander F Tieman, 2005. "Skewed Pricing in Two-Sided Markets: An IO approach," Money Macro and Finance (MMF) Research Group Conference 2005 75, Money Macro and Finance Research Group.
  9. Wilko Bolt & David B. Humphrey, 2005. "Public Good Aspects of TARGET: Natural Monopoly, Scale Economies, and Cost Allocation," DNB Working Papers 036, Netherlands Central Bank, Research Department.

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