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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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Author Info
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.

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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Daniel D. Garcia-Swartz & Robert W. Hahn & Anne Layne-Farrar, 2006. "The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics," Review of Network Economics, Concept Economics, vol. 5(2), pages 175-198, June. [Downloadable!]
  2. Jean-Charles Rochet Author-Email: rochet@cict.fr Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: tirole@cict.fr Author-Workplace-Name: IDEI, University of Toulouse, 2006. "Two-Sided Markets: A Progress Report," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
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  3. repec:bep:eaptop:v:3:y:2003:i:1:p:1069-1069 is not listed on IDEAS
  4. Sujit Chakravorti, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, Concept Economics, vol. 2(2), pages 50-68, June. [Downloadable!]
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  5. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
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  6. Fumiko Hayashi, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, Concept Economics, vol. 5(1), pages 144-174, March. [Downloadable!]
  7. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Blackwell Publishing, vol. 50(2), pages 103-22, June. [Downloadable!] (restricted)
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  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. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics. [Downloadable!]
  10. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department. [Downloadable!]
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  11. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August. [Downloadable!] (restricted)
  12. Daniel D. Garcia-Swartz & Robert W. Hahn & Anne Layne-Farrar, 2006. "The Move Toward a Cashless Society: Calculating the Costs and Benefits," Review of Network Economics, Concept Economics, vol. 5(2), pages 199-228, June. [Downloadable!]
  13. Marius Schwartz & Daniel R. Vincent, 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, Concept Economics, vol. 5(1), pages 72-102, March. [Downloadable!]
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