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Fraud, Investments and Liability Regimes in Payment Platforms

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  • Anna Creti
  • Marianne Verdier
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    Abstract

    In this paper, we discuss how fraud liability regimes impact the price structure that is chosen by a monopolistic payment platform, in a setting where merchants can invest in fraud detection technologies. We show that liability allocation rules distort the price structure charged by platforms or banks to consumers and merchants with respect to a case where such a responsibility regime is not implemented. We determine the allocation of fraud losses between the payment platform and the merchants that maximises the platform's profit and we compare it to the allocation that maximises social welfare.

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    File URL: http://economix.fr/pdf/dt/2011/WP_EcoX_2011-31.pdf
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    Bibliographic Info

    Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2011-31.

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    Length: 54 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:drm:wpaper:2011-31

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    Related research

    Keywords: payment card systems; interchange fees; two-sided markets; fraud; liability;

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    1. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 152, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Carlos Arango & Varya Taylor, 2008. "Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey," Discussion Papers 08-12, Bank of Canada.
    3. Özlem Bedre-Defolie & Emilio Calvano, 2010. "Pricing payment cards," ESMT Research Working Papers ESMT-10-005, ESMT European School of Management and Technology.
    4. Richard J. Sullivan, 2010. "The changing nature of U.S. card payment fraud: industry and public policy options," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q II, pages 101-133.
    5. G. Dari Mattiacci & Francesco Parisi, 2003. "The Economics of Tort Law: A Précis," Working Papers, Utrecht School of Economics 03-13, Utrecht School of Economics.
    6. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 52(1), pages 1-26, 03.
    7. Belleflamme, Paul & Peitz, Martin, 2010. "Platform competition and seller investment incentives," European Economic Review, Elsevier, Elsevier, vol. 54(8), pages 1059-1076, November.
    8. Dionne, Georges & Eeckhoudt, Louis, 1985. "Self-insurance, self-protection and increased risk aversion," Economics Letters, Elsevier, Elsevier, vol. 17(1-2), pages 39-42.
    9. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, De Gruyter, vol. 2(2), pages 1-28, June.
    10. Marianne Verdier, 2011. "Interchange Fees In Payment Card Systems: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 25(2), pages 273-297, 04.
    11. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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