Pricing Debit Card Payments Services: An IO approach
AbstractIn 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 InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 735.
Date of creation: 2003
Date of revision:
Debit card payment systems; two-sided monopolistic pricing; social optimum;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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