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The Determinants of Optimal Interchange Fees in Payment Systems

  • Julian Wright

This paper presents a model of a card payment system as a two-sided market that allows for partial participation by heterogeneous consumers and merchants. Taking into account the strategic effects arising from competition between merchants, the model is used to characterize the optimal structure of fees between those charged to cardholders and those charged to merchants and, more specifically, the level of the interchange fee that banks charge each other. The results modify the existing characterizations of the interchange fee, and explain the source of potential deviations between the privately and socially optimal level of the fee. Copyright Blackwell Publishing Ltd. 2004.

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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 52 (2004)
Issue (Month): 1 (03)
Pages: 1-26

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Handle: RePEc:bla:jindec:v:52:y:2004:i:1:p:1-26
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  1. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  2. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  3. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  4. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
  5. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
  6. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  7. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, June.
  8. Rochet, Jean-Charles & Tirole, Jean, 1999. "Cooperation Among Competitors: The Economics of Credit Card Associations," CEPR Discussion Papers 2101, C.E.P.R. Discussion Papers.
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