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

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  • Bolt, Wilko
  • Humphrey, David

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. JEL Classification: G20, H41, L10

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0505.

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Date of creation: Jul 2005
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Handle: RePEc:ecb:ecbwps:20050505

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

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References

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  1. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  2. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25.
  3. Holthausen, Cornelia & Rochet, Jean-Charles, 2003. "Efficient Pricing of Large Value Interbank Payment Systems," IDEI Working Papers 185, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. 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.
  5. 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," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July.
  6. 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.
  7. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
  8. Khiaonarong, Tanai, 2003. "Payment systems efficiency, policy approaches, and the role of the central bank," Research Discussion Papers 1/2003, Bank of Finland.
  9. 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.
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Cited by:
  1. Christine Beijnen & Wilko Bolt, 2007. "Size matters: economies of scale in European payments processing," DNB Working Papers 155, Netherlands Central Bank, Research Department.

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