Demand externalitites and price cap regulation: Learning from a two-sided market
AbstractThis paper studies unintended consequences of price cap regulation in the presence of demand externalities in the context of payment cards. The recent U.S. debit card regulation was intended to lower merchant card acceptance costs by capping the maximum interchange fee. However, small-ticket merchants found their fees instead higher after the regulation. To address this puzzle, I construct a two-sided market model and show that card demand externalities across merchant sectors rationalize card networks’ pricing response. Based on the model, I study socially optimal card fees and an alternative cap regulation that may avoid the unintended consequence on small-ticket merchants.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-06.
Date of creation: 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-09 (All new papers)
- NEP-BAN-2013-06-09 (Banking)
- NEP-COM-2013-06-09 (Industrial Competition)
- NEP-ENE-2013-06-09 (Energy Economics)
- NEP-NET-2013-06-09 (Network Economics)
- NEP-REG-2013-06-09 (Regulation)
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.:
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- repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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- repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
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NBER Working Papers
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- James McAndrews & Zhu Wang, 2008.
"The economics of two-sided payment card markets: pricing, adoption and usage,"
Research Working Paper
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- 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.
- 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.
- Wright Julian, 2010. "Why Do Merchants Accept Payment Cards?," Review of Network Economics, De Gruyter, vol. 9(3), pages 1-8, August.
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- Foster, Kevin & Schuh, Scott & Zhang, Hanbing, 2013. "The 2010 Survey of Consumer Payment Choice," Research Data Report 13-2, Federal Reserve Bank of Boston.
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