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Interchange fee regulation and service investments

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  • Reisinger, Markus
  • Zenger, Hans

Abstract

This paper analyzes the impact of interchange fee regulation on the investment incentives of a payment card platform in the presence of full merchant internalization. We distinguish between investment in consumer and retailer services. We find that the optimally regulated interchange fee can be above the privately optimal one to induce the platform to invest more in retailer services. We also demonstrate that the two prominent regulatory benchmarks of a zero interchange fee and regulation according to the “tourist test” tend to set too low investment incentives under a total welfare standard. Instead, “tourist test” regulation can be a reasonable approximation under a total user surplus standard.

Suggested Citation

  • Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.
  • Handle: RePEc:eee:indorg:v:66:y:2019:i:c:p:40-77
    DOI: 10.1016/j.ijindorg.2019.05.002
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    References listed on IDEAS

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    Cited by:

    1. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    2. Christian Ewerhart & Sheng Li, 2020. "Imposing choice under ambiguity: the case of dynamic currency conversion," ECON - Working Papers 345, Department of Economics - University of Zurich, revised Jul 2020.

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    More about this item

    Keywords

    Payment cards; Interchange fee; Regulation; Service investment; Two-sided markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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