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Public good issues in TARGET - natural monopoly, scale economies, network effects and cost allocation

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Author Info
Wilko Bolt () (Corresponding author: Research Division, De Nederlandsche Bank, Amsterdam,The Netherlands)
David Humphrey () (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States)

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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. 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. Based on empirical results for the Federal Reserve’s payment system (Fedwire), it is further 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.

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Paper provided by European Central Bank in its series Working Paper Series with number 505.

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Length: 22 pages
Date of creation: Jul 2005
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Handle: RePEc:ecb:ecbwps:20050505

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

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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. Cornelia Holthausen & Jean-Charles Rochet, 2002. "Efficient pricing of large value interbank payment systems," Working Paper Series 184, European Central Bank. [Downloadable!]
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  5. Hancock, Diana & Humphrey, David B. & Wilcox, James A., 1999. "Cost reductions in electronic payments: The roles of consolidation, economies of scale, and technical change," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 391-421, February. [Downloadable!] (restricted)
  6. Khiaonarong, Tanai, 2003. "Payment systems efficiency, policy approaches, and the role of the central bank," Research Discussion Papers 1/2003, Bank of Finland. [Downloadable!]
  7. 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.
  8. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25. [Downloadable!]
  9. 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!]
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Cited by:
(explanations, 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. Elizaveta Krylova & Jussi Nikkinen & Sami Vähämaa, 2005. "Cross-dynamics of volatility term structures implied by foreign exchange options," Working Paper Series 530, European Central Bank. [Downloadable!]
  2. Christine Beijnen & Wilko Bolt, . "Size Matters: Economies of Scale in European Payment Processing," FIW Working Paper series 013, FIW. [Downloadable!]
    Other versions:
  3. Andreas Schabert, 2005. "Discretionary policy, multiple equilibria, and monetary instruments," Working Paper Series 533, European Central Bank. [Downloadable!]
    Other versions:
  4. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Working Paper Series 522, European Central Bank. [Downloadable!]
    Other versions:
  5. Guido Wolswijk, 2005. "On some fiscal effects on mortgage debt growth in the EU," Working Paper Series 526, European Central Bank. [Downloadable!]
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