Assessing effects of price regulation in retail payment systems
AbstractThis paper considers effects of price regulation in retail payment systems by applying the model of tele-communications competition by Laffont-Rey-Tirole (1998). In our two-country model world there is one retail payment network located in each country and markets are segmented à la Hotelling. We show that the optimal price under price regulation is the weighted average of pre-regulation domestic and cross-border prices where the degree of home-bias in making payments serves as the weight. Furthermore, we find that the general welfare effects of price regulation are ambiguous: gross social welfare is higher un-der price discrimination than under price regulation in the special case where costs of access to banking services (transportation costs) are high. However, there also exist cases where prohibitively high transac-tion costs make price discrimination to reduce total welfare. Finally, if transportation costs are reduced sufficiently, segmentation of payment markets is eliminated. Markets then become fully-served as in the original Laffont-Rey-Tirole model, suggesting that price discrimination would be beneficial for welfare.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 19/2005.
Length: 38 pages
Date of creation: 11 Jul 2005
Date of revision:
payment systems; price regulation; retail payments;
Find related papers by JEL classification:
- D49 - Microeconomics - - Market Structure and Pricing - - - Other
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- L59 - Industrial Organization - - Regulation and Industrial Policy - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-21 (All new papers)
- NEP-COM-2006-10-21 (Industrial Competition)
- NEP-FMK-2006-10-21 (Financial Markets)
- NEP-IND-2006-10-21 (Industrial Organization)
- NEP-MIC-2006-10-21 (Microeconomics)
- NEP-REG-2006-10-21 (Regulation)
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