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Market structure and credit card pricing: what drives the interchange?

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  • Zhu Wang
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Abstract

This paper presents a model for the credit card industry, where oligopolistic card networks price their products in a complex marketplace with competing payment instruments, rational consumers/merchants, and competitive card issuers/acquirers. The analysis suggests that card networks demand higher interchange fees to maximize card issuers' profits as card payments become more efficient. At equilibrium, consumer rewards and card transaction volume also increase, while consumer surplus and merchant profits may not. The model provides a unified framework to evaluate credit card industry performance and government interventions.

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File URL: http://www.kansascityfed.org/Publicat/PSR/RWP/Wang-Interchange11-2008.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Payments System Research Working Paper with number PSR WP 06-04.

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Date of creation: 2008
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Handle: RePEc:fip:fedkpw:psrwp06-04

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Keywords: Credit cards ; Markets;

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References

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  1. 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.
  2. Weiner Stuart E. & Wright Julian, 2005. "Interchange Fees in Various Countries: Developments and Determinants," Review of Network Economics, De Gruyter, vol. 4(4), pages 1-34, December.
  3. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  4. James McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
  5. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  6. 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.
  7. Fumiko Hayashi, 2004. "A puzzle of card payment pricing : why are merchants still accepting card payments?," Payments System Research Working Paper PSR WP 04-02, Federal Reserve Bank of Kansas City.
  8. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  9. Zhu Wang, 2006. "Learning, diffusion and the industry life cycle," Payments System Research Working Paper PSR WP 04-01, Federal Reserve Bank of Kansas City.
  10. Rochet Jean-Charles & Tirole Jean, 2006. "Externalities and Regulation in Card Payment Systems," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-14, March.
  11. Schwartz Marius & Vincent Daniel R., 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
  12. Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-19, March.
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Citations

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Cited by:
  1. James McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
  2. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
  3. Oz Shy & Zhu Wang, 2008. "Why do card issuers charge proportional fees?," Research Working Paper RWP 08-13, Federal Reserve Bank of Kansas City.
  4. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of Payment Cards: A Status Report," DNB Working Papers 193, Netherlands Central Bank, Research Department.

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