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A Study of the Interrelated Bilateral Transactions in Credit Card Networks

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Author Info

  • Sujit Chakravorti

    (Federal Reserve Bank of Chicago)

  • Alpa Shah

    (J.P. Morgan)

Abstract

Over the last decade, consumers have tripled their use of credit cards as more merchants have increased their acceptance of them. This increase suggests that incentives in today's marketplace favor greater credit card use by consumers and acceptance by merchants. In this paper, we study the set of interrelated bilateral transactions in credit card networks. First, we survey the recent theoretical papers using this approach and find that there is a lack of consensus regarding the optimal set of pricing policies. Second, we explore each of these interrelated transactions emphasizing common market practices and the underlying regulatory and legal framework. Third, we analyze the impact of certain credit card market practices on competing payment instruments such as debit cards.

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Bibliographic Info

Paper provided by EconWPA in its series Law and Economics with number 0111001.

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Length: 38 pages
Date of creation: 05 Nov 2001
Date of revision:
Handle: RePEc:wpa:wuwple:0111001

Note: Type of Document - Word/pdf; prepared on IBM PC ; to print on HP/PostScript/Franciscan monk; pages: 38 ; figures: included/. This located at:
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Web page: http://128.118.178.162

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Keywords: credit cards; rents; antitrust; networks;

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References

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  1. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25.
  2. William P. Osterberg & James B. Thomson, 1998. "Network externalities: the catch-22 of retail payments innovations," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
  3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  4. Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
  5. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  6. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  7. JOHN M. Barron & MICHAEL E. Staten & JOHN Umbeck, 1992. "Discounts For Cash In Retail Gasoline Marketing," Contemporary Economic Policy, Western Economic Association International, vol. 10(4), pages 89-102, October.
  8. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Kitch, Edmund W, 1990. "The Framing Hypothesis: Is It Supported by Credit Card Issuer Opposition to a Surcharge on a Cash Price?," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 217-33, Spring.
  10. Dennis W. Carlton & Steven C. Salop, 1995. "You Keep On Knocking But You Can't Come In: Evaluating Restrictions On Access To Input Joint Ventures," University of Chicago - George G. Stigler Center for Study of Economy and State 111, Chicago - Center for Study of Economy and State.
  11. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
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Citations

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Cited by:
  1. Sujit Chakravorti & Roberto Roson, 2004. "Platform competition in two-sided markets: the case of payment networks," Working Paper Series WP-04-09, Federal Reserve Bank of Chicago.
  2. Kenneth N. Kuttner & James J. McAndrews, 2001. "Personal on-line payments," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 35-50.
  3. Manchev, Peter, 2006. "Oligopoly Model of a Debit Card Network," MPRA Paper 2460, University Library of Munich, Germany, revised 26 Feb 2007.
  4. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.

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