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Nonbanks in the Payments System: Vertical Integration Issues

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Abstract

We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.

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File URL: http://www.stern.nyu.edu/networks/Economides_Nonbanks_Payments_System.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-06.

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Length: 35 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:net:wpaper:0706

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Web page: http://www.NETinst.org/

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Keywords: payments system; credit cards; debit cards; non-banks; vertical integration; market power; monopoly;

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References

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  1. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  2. Nicholas Economides, 2005. "The Incentive for Vertical Integration," Working Papers 05-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Nicholas Economides, 2001. "The Microsoft Antitrust Case: Rejoinder," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 71-79, March.
  4. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
  5. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
  6. Terri Bradford & Matt Davies & Stuart E. Weiner, 2002. "Nonbanks in the payments system," Payments System Research Working Paper PSR WP 02-02, Federal Reserve Bank of Kansas City.
  7. Rochet Jean-Charles & Tirole Jean, 2003. "An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-11, June.
  8. Gans Joshua S & King Stephen P., 2003. "Approaches to Regulating Interchange Fees in Payment Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-21, June.
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Cited by:
  1. Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-45, NET Institute, revised Nov 2007.
  2. Don H Kim, 2007. "Spanned stochastic volatility in bond markets: a reexamination of the relative pricing between bonds and bond options," BIS Working Papers 239, Bank for International Settlements.

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