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Price cap regulation in a two-sided market: Intended and unintended consequences

Listed author(s):
  • Wang, Zhu
Registered author(s):

This paper studies intended and unintended consequences of price cap regulation in the two-sided payment card market. The recent U.S. debit card regulation was intended to lower merchants' card acceptance costs by capping interchange fees at the issuer cost, but for small-ticket transactions the interchange fee instead rose post-regulation. To address the puzzle, I construct a two-sided market model and show that card demand externalities between large-ticket and small-ticket transactions rationalize card networks' pricing response. Based on the model, I provide a welfare assessment of the issuer cost-based interchange regulation and discuss alternative regulatory approaches.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167718715001423
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 45 (2016)
Issue (Month): C ()
Pages: 28-37

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Handle: RePEc:eee:indorg:v:45:y:2016:i:c:p:28-37
DOI: 10.1016/j.ijindorg.2015.12.004
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-1672, September.
  2. Oz Shy, 2014. "Measuring Some Effects Of The 2011 Debit Card Interchange Fee Reform," Contemporary Economic Policy, Western Economic Association International, vol. 32(4), pages 769-783, October.
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  7. Angrisani, Marco & Foster, Kevin & Hitczenko, Marcin, 2013. "The 2010 Survey of Consumer Payment Choice: technical appendix," Research Data Report 13-3, Federal Reserve Bank of Boston.
  8. 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.
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  13. 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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  17. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
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  19. Wang, Zhu & Schwartz, Scarlett & Mitchell, Neil, 2014. "The Impact of the Durbin Amendment on Merchants: A Survey Study," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 183-208.
  20. Jean‐Charles Rochet & Jean Tirole, 2011. "Must‐Take Cards: Merchant Discounts And Avoided Costs," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 462-495, 06.
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  23. Wang, Zhu, 2010. "Market structure and payment card pricing: What drives the interchange?," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 86-98, January.
  24. Foster, Kevin & Schuh, Scott & Zhang, Hanbing, 2013. "The 2010 Survey of Consumer Payment Choice," Research Data Report 13-2, Federal Reserve Bank of Boston.
  25. 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.
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