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Plastic Clashes: Competition among Closed and Open Systems in the Credit Card Industry

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Author Info

  • Fabio M. Manenti

    (Dept. of Economics "M. Fanno", University of Padua, Italy)

  • Ernesto Somma

    (Dept. of Economics, University of Bari, Italy)

Abstract

This paper analyses market competition between two different types of credit card platforms: not-for-profit associations and proprietary systems. The main focus is on the role of the interchange fee set by not-for-profit platforms. We show that 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 not-for-profit platform and are affected by the strength of inter-platform competition. We also show that the imposition of a ban on the setting of the interchange fee has ambiguous effects on the profit of the proprietary system.

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File URL: http://128.118.178.162/eps/io/papers/0211/0211012.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0211012.

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Date of creation: 06 Nov 2002
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Handle: RePEc:wpa:wuwpio:0211012

Note: Type of Document - Latex; prepared on PC; to print on HP;
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Web page: http://128.118.178.162

Related research

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

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References

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  1. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  3. Joshua S. Gans & Stephen P. King, 2003. "A Theoretical Analysis of Credit Card Reform in Australia," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 462-472, December.
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Citations

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Cited by:
  1. Roberto Roson, 2005. "Platform Competition with Endogenous Multihoming," Working Papers 2005.20, Fondazione Eni Enrico Mattei.
  2. Hayashi Fumiko, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
  3. Fumiko Hayashi & Stuart E. Weiner, 2005. "Competition and credit and debit card interchange fees: a cross-country analysis," Payments System Research Working Paper PSR WP 05-03, Federal Reserve Bank of Kansas City.
  4. 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.
  5. Uwe Dulleck & Hans W. Friederiszick, 2004. "Die Großen Zwei - Wettbewerb im Kreditkartenmarkt?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 224(4), pages 445-470, July.
  6. Fumiko Hayashi & Stuart E. Wiener, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  7. Fumiko Hayashi, 2006. "Pricing and welfare implications of payment card network competition," Payments System Research Working Paper PSR WP 06-03, Federal Reserve Bank of Kansas City.
  8. Verdier, Marianne, 2006. "Retail Payment Systems: What can we Learn from Two-Sided Markets?," MPRA Paper 2606, University Library of Munich, Germany.

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