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What drives the network’s growth? An agent-based study of the payment card market

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  • Alexandrova-Kabadjova, Biliana
  • Negrín, José Luis
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    Abstract

    This paper investigates the impact on the network growth of the level of merchant discount, the level of Multilateral Interchange Fee (MIF), and the consumers' and the merchants' awareness of positive network effects. In an artificial market, in which issuers and acquirers belong to the same network, we simulate explicitly the interactions among consumers and merchants at the point of sale. We allow card issuers to charge fixed fees and provide net benefits from card usage, whereas acquirers could charge fixed and transactional fee. End users have homogeneous convenience benefits and are able to internalize network effects, because to a certain degree consumers are aware of the existence of merchants accepting cards and merchants are aware of the existence of consumers having cards. The MIF ows from acquirers to issuers. We assume there is a maximum level of merchants' discount MD' (reservation price) that the retailers are willing to pay, depending on the level of convenience benefits they receive. We study the case of imperfect competition, in which some acquirers charge a merchants' discount (MD) higher than MD', whereas other acquirers charge a MD lower than MD'. We found that in the case, in which consumers' and merchants' awareness is high, retailers face stronger externalities arriving from the set of cardholders that enjoy transactional benefits and the set of merchants that accept cards by paying lower transactional fees. In this conditions retailers could be obliged to pay variable fees higher than MD'. JEL Classification: G20, G28, C63

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 1143.

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    Date of creation: Dec 2009
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    Handle: RePEc:ecb:ecbwps:20091143

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    Keywords: agent-based modelling; Card payment systems; interchange fees;

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    References

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    1. John Vickers, 2005. "Public policy and the invisible price : competition law, regulation, and the interchange fee," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 231-247.
    2. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. David Evans & Richard Schmalensee, 2007. "The Industrial Organization of Markets with Two-Sided Platforms," CPI Journal, Competition Policy International, vol. 3.
    4. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
    5. Bergman, Mats & Guibourg, Gabriela & Segendorf, Björn, 2007. "The Costs of Paying – Private and Social Costs of Cash and Card Payments," Working Paper Series 212, Sveriges Riksbank (Central Bank of Sweden).
    6. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
    7. Guillermo Ortiz, 2005. "Remarks on interchange fees : central bank perspectives and options," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 289-307.
    8. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    9. Negrín José L., 2005. "The Regulation of Payment Cards: The Mexican Experience," Review of Network Economics, De Gruyter, vol. 4(4), pages 1-23, December.
    10. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
    11. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.
    12. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department.
    13. repec:reg:rpubli:105 is not listed on IDEAS
    14. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of Payment Cards: A Status Report," DNB Working Papers 193, Netherlands Central Bank, Research Department.
    15. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    16. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September.
    17. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
    18. Wilko Bolt & Kimmo Soram�ki, 2008. "Competition, bargaining power and pricing in two-sided markets," DNB Working Papers 181, Netherlands Central Bank, Research Department.
    19. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
    20. repec:reg:wpaper:105 is not listed on IDEAS
    21. Stuart E. Weiner, 2008. "The Federal Reserve's role in retail payments: adapting to a new environment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 35-63.
    22. 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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