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Pricing in vertically integrated network switches

Author

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  • James J. McAndrews

Abstract

Many automated teller machine (ATM) networks are partially vertically integrated. A group of downstream retail banks own and operate the upstream network switch. The size of the group varies from network to network. The same situation exists in other network businesses, including airline computer reservation systems and credit card networks. Here the author takes as parametric the size of the group that owns the upstream network, the monopoly structure of the upstream network switch, as well as the size of the downstream industry, all the members of which are connected to the switch. Given these assumptions, the author models the pricing and output behavior of the group of owners as the number of its members varies. The analysis suggests that the more inclusive is the ownership group in a vertically integrated network, the more likely that the network adopts a flat fee (as a function of volume) pricing schedule. Also, the output of the downstream industry initially rises as the ownership group expands, but then contracts as the ownership group includes all of the downstream firms.

Suggested Citation

  • James J. McAndrews, 1996. "Pricing in vertically integrated network switches," Working Papers 96-19, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:96-19
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    References listed on IDEAS

    as
    1. McAndrews, James J. & Rob, Rafael, 1996. "Shared ownership and pricing in a network switch," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 727-745, October.
    2. Hanif D. Sherali, 1984. "A Multiple Leader Stackelberg Model and Analysis," Operations Research, INFORMS, vol. 32(2), pages 390-404, April.
    3. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-1237, December.
    4. James J. McAndrews, 1992. "Results of a survey of ATM network pricing," Working Papers 92-7, Federal Reserve Bank of Philadelphia.
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    Cited by:

    1. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Bank of Finland Research Discussion Papers 16/2003, Bank of Finland.
    2. James J. McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia.
    3. Cvsa, Viswanath & Gilbert, Stephen M., 2002. "Strategic commitment versus postponement in a two-tier supply chain," European Journal of Operational Research, Elsevier, vol. 141(3), pages 526-543, September.
    4. repec:zbw:bofrdp:2003_016 is not listed on IDEAS
    5. JAMES J. McANDREWS, 1999. "E‐Money And Payment System Risks," Contemporary Economic Policy, Western Economic Association International, vol. 17(3), pages 348-357, July.
    6. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, University Library of Munich, Germany.
    7. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.

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