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Microfoundations of two-sided markets: the payment card example

Author

Listed:
  • James J. McAndrews
  • Zhu Wang

Abstract

This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry dynamics and sheds light on the puzzle of asymmetric pricing. ; Previous title: Payment industry dynamics: a two-sided market approach

Suggested Citation

  • James J. McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkpw:psrwp06-01
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    File URL: http://www.kansascityfed.org/publicat/psr/rwp/PaymentDynamics.pdf
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    References listed on IDEAS

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    1. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
    2. Zhu Wang, 2006. "Learning, diffusion and the industry life cycle," Payments System Research Working Paper PSR WP 04-01, Federal Reserve Bank of Kansas City.
    3. Courchane, Marsha & Nickerson, David & Sullivan, Richard, 2002. "Investment in internet banking as a real option: theory and tests," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 347-363.
    4. Richard J. Sullivan, 2004. "Payment services and the evolution of Internet banking," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Aug.
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    8. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
    9. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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    11. Berger, Allen N. & Mester, Loretta J., 2005. "Erratum to "Explaining the dramatic changes in performance of US banks: Technological change, deregulation, and dynamic changes in competition" [J. Fin. Intermed. 12 (2003) 57-95]," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 278-279, April.
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    Cited by:

    1. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer choice and merchant acceptance of payment media," Working Paper Series WP-08-11, Federal Reserve Bank of Chicago.
    2. Antoine Martin & Michael Orlando, 2007. "Barriers to network-specific investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 705-728, October.
    3. Fumiko Hayashi, 2008. "The economics of payment card fee structure: policy considerations of payment card rewards," Research Working Paper RWP 08-08, Federal Reserve Bank of Kansas City.
    4. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of payment cards: a status report," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 32(Q IV), pages 15-27.
    5. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what drives payment card rewards?," Research Working Paper RWP 08-07, Federal Reserve Bank of Kansas City.
    6. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?," Research Working Paper RWP 08-06, Federal Reserve Bank of Kansas City.
    7. Bolt, Wilko & Schmiedel, Heiko, 2009. "SEPA, efficiency, and payment card competition," Working Paper Series 1140, European Central Bank.

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