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Interoperability and Network Externalities in Electronic Payments

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    Abstract

    The causes of and extent of network externalitites in paymeny 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 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 gathereed and used in a statistical description of the evolution of the market. Also the hypothesis regarding the positive effetcs of standardisation for the evolution of the market is tested. The results are highly significant an 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 off between 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 differentiation.

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    Bibliographic Info

    Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2001:7.

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    Length: 38 pages
    Date of creation: 13 Aug 2001
    Date of revision:
    Handle: RePEc:hhs:sunrpe:2001_0007

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    Keywords: payment systems; efficiency; network externalities;

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    Cited by:
    1. 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.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    3. 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.

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