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Toward a theory of merchant credit card acceptance

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  • Sujit Chakravorti
  • Ted To

Abstract

In this article, we construct a two-period model to investigate what market conditions would support a credit card equilibrium given two commonly observed credit card pricing conventions consumers rarely are charged higher prices for using their credit cards and if they payoff their credit card obligations every month, they enjoy interest-free short-term credit. The results of the model indicate that when the card issuer's cost of funds is not too high and the merchant's profit margin is sufficiently high, a credit card equilibrium can exist. We also and that the credit-issuer's ability to charge higher merchant discount fees depends on the number of customers gained when credit cards are accepted. Thus, credit cards exhibit characteristics of network goods.

Suggested Citation

  • Sujit Chakravorti & Ted To, 1999. "Toward a theory of merchant credit card acceptance," Working Paper Series WP-99-16, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-99-16
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/1999/wp99_16.pdf
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    References listed on IDEAS

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    1. Economides, Nicholas, 1996. "The economics of networks," International Journal of Industrial Organization, Elsevier, pages 673-699.
    2. Whitesell, William C, 1992. "Deposit Banks and the Market for Payment Media," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 483-498, November.
    3. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    4. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, pages 1327-1336.
    5. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    6. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
    7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, pages 424-440.
    8. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, pages 63-77.
    9. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Sujit Chakravorti & Timothy McHugh, 2002. "Why do we use so many checks?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-59.
    2. Tschoegl, Adrian E., 2004. "Who owns the major US subsidiaries of foreign banks?: A note," Journal of International Financial Markets, Institutions and Money, Elsevier, pages 255-266.
    3. Brian Mantel & Timothy McHugh, 2001. "Competition and innovation in the consumer e-payments market? considering the demand, supply, and public policy issues," Occasional Paper; Emerging Payments EPS-2001-4, Federal Reserve Bank of Chicago.
    4. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer;Western Finance Association, pages 5-27.

    More about this item

    Keywords

    Credit cards ; Payment systems;

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