Two-sided network effects, bank interchange fees, and the allocation of fixed costs
AbstractTwo-sided network effects in card payment systems are analysed under different market structures, e.g., competition, one-sided monopoly, bilateral monopoly and duopoly; with and without an interchange fee; for the so-called Baxter case of non-strategic merchants. A partial ranking of market structures according to their welfare effects is provided. Fixed central (card) system costs are introduced and analysed under free entry and duopoly. It is shown that under free entry, a per-transaction distribution of fixed costs is preferrable to dividing the fixed cost in equal proportions between the paritcipants. Under duopoly, (and no entry) a fixed division of central costs will yield lower prices.
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Bibliographic InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2005:1.
Length: 32 pages
Date of creation: 03 Jan 2005
Date of revision:
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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Two-sided markets; card payentd; payment systems; acquiring; issuing; market structure;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-20 (All new papers)
- NEP-COM-2005-02-20 (Industrial Competition)
- NEP-FIN-2005-02-20 (Finance)
- NEP-NET-2005-02-20 (Network Economics)
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- David S. Evans & Richard Schmalensee, 2005.
"The economics of interchange fees and their regulation : an overview,"
Proceedings – Payments System Research Conferences,
Federal Reserve Bank of Kansas City, issue May, pages 73-120.
- Evans, David S. & Schmalensee, Richard L., 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working paper 105, Regulation2point0.
- Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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