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The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?

  • Fumiko Hayashi

This paper theoretically considers the optimal balance between the merchant fee and the cardholder fee (rewards) from both efficiency and equity perspectives. First, the paper constructs the models that can be used by the U.S. policymakers. Because theoretical results are very sensitive to the assumptions of the models, it is important to construct models that reflect the reality of the market. Second, the most efficient fee structure and product price are considered under the various combinations of the assumptions. And finally, the paper considers welfare consequences of the most efficient fee structure. ; Also issued as a Payments System Research Working Paper.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-06.

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Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedkrw:rwp08-06
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  1. Garcia-Swartz Daniel D. & Hahn Robert W. & Layne-Farrar Anne, 2006. "The Move Toward a Cashless Society: Calculating the Costs and Benefits," Review of Network Economics, De Gruyter, vol. 5(2), pages 1-30, June.
  2. Jean Tirole & Jean-Charles Rochet, 2006. "Two-Sided Markets : A Progress Report," Post-Print hal-00173715, HAL.
  3. repec:bpj:rneart:v:5:y:2006:i:2:p:175-198 is not listed on IDEAS
  4. Fumiko Hayashi, 2009. "Do U.S. consumers really benefit from payment card rewards?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 37-63.
  5. Fumiko Hayashi, 2004. "A puzzle of card payment pricing : why are merchants still accepting card payments?," Payments System Research Working Paper PSR WP 04-02, Federal Reserve Bank of Kansas City.
  6. Sujit Chakravorti, 2003. "Theory of credit card networks: a survey of the literature," Payment Cards Center Discussion Paper 03-09, Federal Reserve Bank of Philadelphia.
  7. Guthrie, Graeme & Wright, Julian, 2003. "Competing Payment Schemes," Working Papers 173, Department of Economics, The University of Auckland.
  8. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  9. Margaret Carten & Daniel A. Littman & Scott Schuh & Joanna Stavins, 2007. "Consumer behavior and payment choice : 2006 conference summary," Public Policy Discussion Paper 07-4, Federal Reserve Bank of Boston.
  10. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  11. 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.
  12. Schwartz Marius & Vincent Daniel R., 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
  13. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  14. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  15. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  16. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  17. Fumiko Hayashi & Stuart E. Weiner, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  18. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
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