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Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee

Author

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  • Kim Huynh
  • Gradon Nicholls
  • Oleksandr Shcherbakov

Abstract

The market for payments is an important two-sided one, where consumers benefit from increased merchant acceptance of payment cards and vice versa. The dependence between the decisions that are made on each side of the market results in various network externalities that are often discussed but rarely quantified. We construct and estimate a structural two-stage model of equilibrium in a market for payments in order to quantify the network externalities and identify the main determinants of consumer and merchant decisions. The estimation results suggest significant heterogeneity in consumer adoption costs and benefits. We discuss the critical characteristics that determine which payment instrument is used at the point of sale. Our counterfactual simulation measures the degree of excessive intermediation by credit card providers.

Suggested Citation

  • Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2022. "Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee," Staff Working Papers 22-15, Bank of Canada.
    • Handle: RePEc:bca:bocawp:22-15
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    References listed on IDEAS

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    Cited by:

    1. Lucas A. Mariani & Jose Renato Haas Ornelas & Bernardo Ricca, 2023. "Banks’ Physical Footprint and Financial Technology Adoption," Working Papers Series 576, Central Bank of Brazil, Research Department.
    2. Walter Engert & Kim Huynh, 2022. "Cash, COVID-19 and the Prospects for a Canadian Digital Dollar," Discussion Papers 2022-17, Bank of Canada.
    3. Angelika Welte & Joy Wu, 2023. "The 2021–22 Merchant Acceptance Survey Pilot Study," Discussion Papers 2023-1, Bank of Canada.
    4. Brown, Martin & Hentschel, Nicole & Mettler, Hannes & Stix, Helmut, 2022. "The convenience of electronic payments and consumer cash demand," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 86-102.
    5. Christopher Henry & Matthew Shimoda & Julia Zhu, 2022. "2021 Methods-of-Payment Survey Report," Discussion Papers 2022-23, Bank of Canada.
    6. Mariani, Lucas A. & Haas Ornelas, José Renato & Ricca, Bernardo, 2023. "Banks’ Physical Footprint and Financial Technology Adoption," IDB Publications (Working Papers) 12812, Inter-American Development Bank.
    7. James Chapman & Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Francisco Rivadeneyra & Yu Zhu, 2023. "Central Bank Digital Currencies and Banking: Literature Review and New Questions," Discussion Papers 2023-4, Bank of Canada.
    8. Anton Schautzer & Helmut Stix, 2022. "Past and future development of euro cash in Austria – resilience in light of technological change and economic crises," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1-Q2/22, pages 21-46.

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    More about this item

    Keywords

    Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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