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Do Card Users Benefit From the Use of Proportional Fees?

Listed author(s):
  • Miao Chun-Hui


    (Department of Economics, University of South Carolina, 1705 College St., Columbia, SC 29208, USA)

It has been shown recently that both card networks’ profits and consumer welfare are higher when the networks charge proportional fees than when they charge fixed per-transaction fees. In this paper, we reexamine this result in a market characterized by free entry. We find that private profitability is not always compatible with consumer welfare maximization: while card networks always benefit from the use of proportional fees, consumer welfare may get reduced. A simple calibration exercise confirms that a proportional fee could harm consumers under reasonable parameter values.

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Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 12 (2014)
Issue (Month): 3 (January)
Pages: 323-341

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Handle: RePEc:bpj:rneart:v:12:y:2014:i:3:p:323-341:n:1
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