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A study of the interrelated bilateral transactions in credit card networks

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  • Sujit Chakravorti
  • Alpa Shah

Abstract

Over the last decade, consumers have tripled their use of credit cards as more merchants have increased their acceptance of them. This increase suggests that incentives in today's marketplace favor greater credit card use by consumers and acceptance by merchants. In this paper, we study the set of interrelated bilateral transactions in credit card networks. First, we survey the recent theoretical papers using this approach and find there is a lack of consensus regarding the optimal set of pricing policies. Second, we explore each of these interrelated transactions emphasizing common market practices and the underlying regulatory and legal framework. Third, we analyze the impact of certain credit card market practices on competing payment instruments such as debit cards.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Occasional Paper; Emerging Payments with number EPS-2001-2.

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Date of creation: 2001
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Handle: RePEc:fip:fedhop:eps-2001-2

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Keywords: Credit cards ; Debit cards ; Payment systems;

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References

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  1. Dennis W. Carlton & Steven C. Salop, 1995. "You Keep On Knocking But You Can't Come In: Evaluating Restrictions On Access To Input Joint Ventures," University of Chicago - George G. Stigler Center for Study of Economy and State 111, Chicago - Center for Study of Economy and State.
  2. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
  3. William P. Osterberg & James B. Thomson, 1998. "Network externalities: the catch-22 of retail payments innovations," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
  4. Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
  5. Kitch, Edmund W, 1990. "The Framing Hypothesis: Is It Supported by Credit Card Issuer Opposition to a Surcharge on a Cash Price?," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 217-33, Spring.
  6. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25.
  7. JOHN M. Barron & MICHAEL E. Staten & JOHN Umbeck, 1992. "Discounts For Cash In Retail Gasoline Marketing," Contemporary Economic Policy, Western Economic Association International, vol. 10(4), pages 89-102, October.
  8. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 673-699, October.
  9. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  11. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
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Cited by:
  1. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  2. 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.
  3. Manchev, Peter, 2006. "Oligopoly Model of a Debit Card Network," MPRA Paper 2460, University Library of Munich, Germany, revised 26 Feb 2007.
  4. Kenneth N. Kuttner & James J. McAndrews, 2001. "Personal on-line payments," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 35-50.

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