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The economics of two-sided payment card markets: pricing, adoption and usage

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  • James J. McAndrews
  • Zhu Wang

Abstract

This paper provides a new theory for two-sided payment card markets. Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Analyzing adoption and usage externalities among heterogeneous consumers and merchants, our theory derives the equilibrium card adoption and usage pattern consistent with empirical evidence. Our analysis also helps explain the card pricing puzzles, particularly the high and rising merchant (interchange) fees. Based on the theoretical framework, we discuss socially desirable payment card fees as well as the interchange fee cap regulation.

Suggested Citation

  • James J. McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:12-06
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Wang, Zhu, 2016. "Price cap regulation in a two-sided market: Intended and unintended consequences," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 28-37.
    2. Zhu Wang & Alexander L. Wolman, 2014. "Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions," Working Paper 14-9, Federal Reserve Bank of Richmond.
    3. Oz Shy & Zhu Wang, 2011. "Why Do Payment Card Networks Charge Proportional Fees?," American Economic Review, American Economic Association, vol. 101(4), pages 1575-1590, June.
    4. Bernardo Batiz-Lazo & Gustavo A. Del Angel, 2016. "The Dawn of the Plastic Jungle: The Introduction of the Credit Card in Europe and North America, 1950-1975," Economics Working Papers 16107, Hoover Institution, Stanford University.
    5. Zhu Wang, 2013. "Demand externalitites and price cap regulation: Learning from a two-sided market," Working Paper 13-06, Federal Reserve Bank of Richmond.
    6. Zhu Wang, 2012. "Debit card interchange fee regulation: some assessments and considerations," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(3Q), pages 159-182.
    7. Korsgaard, Søren, 2014. "Paying for payments: free payments and optimal interchange fees," Working Paper Series 1682, European Central Bank.
    8. Ron Borzekowski & Elizabeth K. Kiser & Mark D. Manuszak & Robin A. Prager, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
    9. Arifovic, Jasmina & Duffy, John & Jiang, Janet Hua, 2023. "Adoption of a new payment method: Experimental evidence," European Economic Review, Elsevier, vol. 154(C).
    10. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
    11. Li, Bin Grace & McAndrews, James & Wang, Zhu, 2020. "Two-sided market, R&D, and payments system evolution," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 180-199.
    12. Wang, Zhu & Wolman, Alexander L., 2016. "Payment choice and currency use: Insights from two billion retail transactions," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 94-115.
    13. Nicole Jonker, 2018. "What drives bitcoin adoption by retailers," DNB Working Papers 585, Netherlands Central Bank, Research Department.
    14. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    15. Zhu Wang, 2010. "Regulating debit cards: the case of ad valorem fees," Economic Review, Federal Reserve Bank of Kansas City, vol. 95(Q I), pages 71-93.
    16. Wang, Zhu, 2010. "Market structure and payment card pricing: What drives the interchange?," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 86-98, January.
    17. Jonker Nicole, 2011. "Card Acceptance and Surcharging: the Role of Costs and Competition," Review of Network Economics, De Gruyter, vol. 10(2), pages 1-35, June.
    18. Nicole Jonker & Anneke Kosse & Lola Hernández, 2012. "Cash usage in the Netherlands: How much, where, when, who and whenever one wants?," DNB Occasional Studies 1002, Netherlands Central Bank, Research Department.
    19. Aurazo, Jose & Vega, Milton, 2021. "Why people use digital payments: Evidence from micro data in Peru," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(4).
    20. Jonker Nicole, 2011. "Card Acceptance and Surcharging: the Role of Costs and Competition," Review of Network Economics, De Gruyter, vol. 10(2), pages 1-35, June.

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