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A Theoretical Analysis of Credit Card Reform in Australia

Author

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  • Joshua S. Gans
  • Stephen P. King

Abstract

The Reserve Bank of Australia (RBA) moved to reform credit card associations by increasing entry, allowing merchants to surcharge for card payments and regulating the interchange fee. We develop a simple model of payment systems designed to analyse the impact of these reforms. We build on the RBA's main assumptions and provide a justification for some of their concerns about excessive card use. Allowing merchants to surcharge may eliminate much of the concern over the interchange fee. On the other hand, the RBA's proposed interchange fee, based entirely on issuer costs, is unlikely to be socially optimal.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:ecorec:v:79:y:2003:i:247:p:462-472
    DOI: 10.1111/j.1475-4932.2003.00145.x
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    References listed on IDEAS

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    1. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
    2. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654, Elsevier.
    3. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    4. 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 541-588, October.
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    Cited by:

    1. Sandra Deungoue, 2008. "Compétition pour les paiements : une titanomachie revisitée par la modélisation multi-agents," Post-Print halshs-00269129, HAL.
    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. Stephen P. King, 2013. "Two-Sided Markets," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 46(2), pages 247-258, June.
    4. Graeme Guthrie & Julian Wright, 2007. "Competing Payment Schemes," Journal of Industrial Economics, Wiley Blackwell, vol. 55(1), pages 37-67, March.
    5. Fumiko Hayashi & Stuart E. Weiner, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, vol. 91(Q III), pages 75-112.
    6. Chakravorti Sujit, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-19, June.
    7. Hunt Robert M., 2003. "An Introduction to the Economics of Payment Card Networks," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-17, June.
    8. Aysan, Ahmet Faruk & Lerzan, Yildiz, 2006. "The Regulation of the Credit Card Market in Turkey," MPRA Paper 5490, University Library of Munich, Germany.
    9. Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
    10. Fabio M. Manenti & Ernesto Somma, 2002. "Plastic Clashes: Competition among Closed and Open Systems in the Credit Card Industry," Industrial Organization 0211012, University Library of Munich, Germany.
    11. Ming-Hua Liu & Dimitris Margaritis & Yang Zhang, 2023. "The impact of regulation on credit card market competition: evidence from Australia," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(3), pages 669-689, September.
    12. 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.
    13. Abbas Valadkhani & Sajid Anwar & Amir Arjomandi, 2014. "Downward stickiness of interest rates in the Australian credit card market," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 19(1), pages 52-65, January.
    14. Sandra Deungoue, 2008. "Compétition pour les paiements : une titanomachie revisitée par la modélisation multi-agents," Working Papers 0810, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    15. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.

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