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Interoperability and Network Externalities in Electronic Payments

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  • Guibourg, Gabriela

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    (Financial Stability Department, Central Bank of Sweden)

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    Abstract

    The causes of and extent of network externalities in payment systems such as the ATM and the ACH-market have been analysed and tested in earlier studies. In this paper a similar study is made for the market for electronic card payments, i.e. the EFTPOS-market. A panel data set of variables relevant to the evolution of the EFTPOS market in the G-10 countries, Australia and the Nordic countries for the period 1988-1999 is gathered and used in a statistical description of the evolution of the market. Also the hypothesis regarding the positive effects of standardisation for the evolution of the market is tested. The results are highly significant and the coefficients have the expected signs. A model that describes the banks' adoption decision of EFTPOS technology is developed. It is assumed that if network externalities are present, the larger the use of common standards, the larger will be the transaction demand for this particular instrument. Within the specific context of the EFTPOS market, the model illustrates the trade obetween network effects and competition effects often described in the literature. Existence of pure strategy equilibria requires that banks are not exceedingly asymmetric in terms of their relative sizes in the acquiring market. The full adoption with common standards outcome is more likely to result the smaller benefits banks derive from dierentiation.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 126.

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    Length: 46 pages
    Date of creation: 01 Sep 2001
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0126

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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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    Keywords: Interoperability; Network Externalities; Electronic Payments;

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    References

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    1. Nicholas Economides, 1995. "The Economics of Networks," Working Papers 94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
    2. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    3. James J. McAndrews, 1996. "Retail pricing of ATM network services," Working Papers 96-12, Federal Reserve Bank of Philadelphia.
    4. Dennis W. Carlton & Alan S. Frankel, 1995. "Antitrust and payment technologies," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 41-54.
    5. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    6. James J. McAndrews, 1991. "The evolution of shared ATM networks," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-16.
    7. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Gautam Gowrisankaran & Joan Stavins, 1999. "Are there network externalities in electronic payments?," Proceedings 652, Federal Reserve Bank of Chicago.
    9. David Humphrey & Moshe Kim & Bent Vale, 1998. "Realizing the gains from electronic payments: costs, pricing, and payment choice," Proceedings 586, Federal Reserve Bank of Chicago.
    10. Matutes, Carmen & Regibeau, Pierre, 1996. "A selective review of the economics of standardization. Entry deterrence, technological progress and international competition," European Journal of Political Economy, Elsevier, vol. 12(2), pages 183-209, September.
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    Cited by:
    1. Kaie Kerem & Vello Vensel, 2005. "Theory and Empirical Evidence of Business Support Networks," Working Papers 129, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    3. Vello Vensel, 2004. "Operation of Business Supporting Networks: Evidence from an EU Candidate Country," Working Papers 117, Tallinn School of Economics and Business Administration, Tallinn University of Technology.

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