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The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?

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  • Fumiko Hayashi

Abstract

This paper theoretically considers the optimal balance between the merchant fee and the cardholder fee (rewards) from both efficiency and equity perspectives. First, the paper constructs the models that can be used by the U.S. policymakers. Because theoretical results are very sensitive to the assumptions of the models, it is important to construct models that reflect the reality of the market. Second, the most efficient fee structure and product price are considered under the various combinations of the assumptions. And finally, the paper considers welfare consequences of the most efficient fee structure. ; Also issued as a Payments System Research Working Paper.

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File URL: http://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/RWP08-06.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-06.

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Date of creation: 2008
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Handle: RePEc:fip:fedkrw:rwp08-06

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References

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  1. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  2. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  3. Fumiko Hayashi, 2009. "Do U.S. consumers really benefit from payment card rewards?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 37-63.
  4. 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.
  5. Fumiko Hayashi & Stuart E. Wiener, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  6. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  7. 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.
  8. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  9. repec:rne:rneart:v:5:y:2006:i:2:p:175-198 is not listed on IDEAS
  10. Chakravorti Sujit, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-19, June.
  11. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  12. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  13. Garcia-Swartz Daniel D. & Hahn Robert W. & Layne-Farrar Anne, 2006. "The Move Toward a Cashless Society: Calculating the Costs and Benefits," Review of Network Economics, De Gruyter, vol. 5(2), pages 1-30, June.
  14. Margaret Carten & Dan Littman & Scott Schuh & Joanna Stavins, 2007. "Consumer behavior and payment choice : 2006 conference summary," Public Policy Discussion Paper 07-4, Federal Reserve Bank of Boston.
  15. 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.
  16. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  17. 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. Oz Shy, 2010. "A short survey of network economics," Working Papers 10-3, Federal Reserve Bank of Boston.
  2. Fumiko Hayashi, 2008. "The economics of payment card fee structure: policy considerations of payment card rewards," Research Working Paper RWP 08-08, Federal Reserve Bank of Kansas City.
  3. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what drives payment card rewards?," Research Working Paper RWP 08-07, Federal Reserve Bank of Kansas City.

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