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Plastic Clashes: Competition Among Closed and Open Payment Systems

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  • Fabio Maria Manenti

    ()
    (University of Padua)

  • Ernesto Somma

    ()
    (University of Bari and Presidenza del Consiglio dei Ministri)

Abstract

This paper analyses market competition between two different types of payment schemes: card associations and proprietary systems. The main focus is on the role of the collective setting of the interchange fee by members of the association. We describe the sterilising role of the interchange fee: when the interchange fee is set so as to maximise the sum of issuers' and acquirers' profits, the equilibrium values of platforms' profits, of the sum of the fees charged by each platform and their market shares are independent of the competitive conditions within the associated members on the two sides of the market and are affected by the strength of inter-platform competition. We also show that the privately set interchange fee is socially inefficient, although this is not due to anticompetitive reasons.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0111.

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Length: 30 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:pad:wpaper:0111

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Keywords: credit cards; interchange fee; two-sided markets; network externalities;

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  1. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(4), pages 990-1029, 06.
  2. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, De Gruyter, vol. 2(2), pages 1-28, June.
  3. Nicholas Economides, . "Network Economics with Application to Finance," Financial Networks, Economics of Networks _004, Economics of Networks.
  4. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of Payment Cards: A Status Report," DNB Working Papers, Netherlands Central Bank, Research Department 193, Netherlands Central Bank, Research Department.
  5. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(3), pages 541-88, October.
  6. Gans Joshua S & King Stephen P., 2003. "Approaches to Regulating Interchange Fees in Payment Systems," Review of Network Economics, De Gruyter, De Gruyter, vol. 2(2), pages 1-21, June.
  7. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  8. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization, EconWPA 0108001, EconWPA.
  9. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, De Gruyter, vol. 5(1), pages 1-25, March.
  10. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  11. Graeme Guthrie & Julian Wright, 2007. "COMPETING PAYMENT SCHEMES -super-* ," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 55(1), pages 37-67, 03.
  12. Bolt, Wilko & Tieman, Alexander F., 2008. "Heavily skewed pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(5), pages 1250-1255, September.
  13. Geoffrey G. Parker & Marshall W. Van Alstyne, 2005. "Two-Sided Network Effects: A Theory of Information Product Design," Management Science, INFORMS, INFORMS, vol. 51(10), pages 1494-1504, October.
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