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Interoperability and Network Externalities in Electronic Payments

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  • Guibourg, Gabriela

    () (Financial Stability Department, Central Bank of Sweden)

Abstract

The causes of and extent of network externalities in payment systems such as the ATM and the ACH-market have been analysed and tested in earlier studies. In this paper a similar study is made for the market for electronic card payments, i.e. the EFTPOS-market. A panel data set of variables relevant to the evolution of the EFTPOS market in the G-10 countries, Australia and the Nordic countries for the period 1988-1999 is gathered and used in a statistical description of the evolution of the market. Also the hypothesis regarding the positive effects of standardisation for the evolution of the market is tested. The results are highly significant and the coefficients have the expected signs. A model that describes the banks' adoption decision of EFTPOS technology is developed. It is assumed that if network externalities are present, the larger the use of common standards, the larger will be the transaction demand for this particular instrument. Within the specific context of the EFTPOS market, the model illustrates the trade obetween network effects and competition effects often described in the literature. Existence of pure strategy equilibria requires that banks are not exceedingly asymmetric in terms of their relative sizes in the acquiring market. The full adoption with common standards outcome is more likely to result the smaller benefits banks derive from dierentiation.

Suggested Citation

  • Guibourg, Gabriela, 2001. "Interoperability and Network Externalities in Electronic Payments," Working Paper Series 126, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0126
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    File URL: http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/wp_126.pdf
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    References listed on IDEAS

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    1. James J. McAndrews, 1996. "Retail pricing of ATM network services," Working Papers 96-12, Federal Reserve Bank of Philadelphia.
    2. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    3. Humphrey, David B & Kim, Moshe & Vale, Bent, 2001. "Realizing the Gains from Electronic Payments: Costs, Pricing, and Payment Choice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 216-234, May.
    4. Gautam Gowrisankaran & Joanna Stavins, 1999. "Are there network externalities in electronic payments?," Proceedings 652, Federal Reserve Bank of Chicago.
    5. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    6. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Matutes, Carmen & Regibeau, Pierre, 1996. "A selective review of the economics of standardization. Entry deterrence, technological progress and international competition," European Journal of Political Economy, Elsevier, vol. 12(2), pages 183-209, September.
    8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    9. Dennis W. Carlton & Alan S. Frankel, 1995. "Antitrust and payment technologies," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 41-54.
    10. James J. McAndrews, 1991. "The evolution of shared ATM networks," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-16.
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    Cited by:

    1. Kaie Kerem & Vello Vensel, 2005. "Theory and Empirical Evidence of Business Support Networks," Working Papers 129, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    3. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
    4. Vello Vensel, 2004. "Operation of Business Supporting Networks: Evidence from an EU Candidate Country," Working Papers 117, Tallinn School of Economics and Business Administration, Tallinn University of Technology.

    More about this item

    Keywords

    Interoperability; Network Externalities; Electronic Payments;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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