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Public good issues in TARGET: natural monopoly, scale economies, network effects and cost allocation

Author

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  • Bolt, Wilko
  • Humphrey, David

Abstract

This paper discusses various theoretic concepts which play a role in assessing the public benefits of Target, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the 'most efficient scale' or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing. Based on empirical results for the Federal Reserve's payment system (Fedwire), it is further argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs. JEL Classification: G20, H41, L10

Suggested Citation

  • Bolt, Wilko & Humphrey, David, 2005. "Public good issues in TARGET: natural monopoly, scale economies, network effects and cost allocation," Working Paper Series 505, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2005505
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    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp505.pdf
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    References listed on IDEAS

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    1. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-462, July.
    2. Holthausen, Cornelia & Rochet, Jean-Charles, 2006. "Efficient Pricing of Large Value Interbank Payment Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1797-1818, October.
    3. Hancock, Diana & Humphrey, David B. & Wilcox, James A., 1999. "Cost reductions in electronic payments: The roles of consolidation, economies of scale, and technical change," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 391-421, February.
    4. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    5. W. Bolt & A.F. Tieman, 2003. "Pricing Debit Card Payments Services: An IO approach," WO Research Memoranda (discontinued) 735, Netherlands Central Bank, Research Department.
    6. Khiaonarong, Tanai, 2003. "Payment systems efficiency, policy approaches, and the role of the central bank," Research Discussion Papers 1/2003, Bank of Finland.
    7. Robin Mason & Tommaso M. Valletti, 2001. "Competition in Communication Networks: Pricing and Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 17(3), pages 389-415.
    8. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25.
    9. Robert M. Adams & Paul W. Bauer & Robin C. Sickles, 2002. "Scope and scale economies in Federal Reserve payment processing," Working Paper 0213, Federal Reserve Bank of Cleveland.
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    Citations

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    Cited by:

    1. Beijnen, Christine & Bolt, Wilko, 2009. "Size matters: Economies of scale in European payments processing," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 203-210, February.
    2. Guido K. Schaefer, 2008. "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW.

    More about this item

    Keywords

    most efficient scale; natural monopoly; partial subsidy; public good;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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