Assessing effects of price regulation in retail payment systems
This paper considers effects of price regulation in retail payment systems by applying the model of tele-communications competition by Laffont-Rey-Tirole (1998). In our two-country model world there is one retail payment network located in each country and markets are segmented à la Hotelling. We show that the optimal price under price regulation is the weighted average of pre-regulation domestic and cross-border prices where the degree of home-bias in making payments serves as the weight. Furthermore, we find that the general welfare effects of price regulation are ambiguous: gross social welfare is higher un-der price discrimination than under price regulation in the special case where costs of access to banking services (transportation costs) are high. However, there also exist cases where prohibitively high transac-tion costs make price discrimination to reduce total welfare. Finally, if transportation costs are reduced sufficiently, segmentation of payment markets is eliminated. Markets then become fully-served as in the original Laffont-Rey-Tirole model, suggesting that price discrimination would be beneficial for welfare.
|Date of creation:||11 Jul 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.suomenpankki.fi/en/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
- THISSE, Jacques-François & VIVES, Xavier, .
"On the strategic choice of spatial price policy,"
CORE Discussion Papers RP
-793, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Wouter Dessein, 2000.
"Network Competition in Nonlinear Pricing,"
CIG Working Papers
FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- 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.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
- Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
- Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
- Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2005_019. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman)
If references are entirely missing, you can add them using this form.