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Interoperability and Network Externalities in Electronic Payments

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Abstract

The causes of and extent of network externalitites in paymeny 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 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 gathereed and used in a statistical description of the evolution of the market. Also the hypothesis regarding the positive effetcs of standardisation for the evolution of the market is tested. The results are highly significant an 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 off between 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 differentiation.

Suggested Citation

  • Guibourg, Gabriela, 2001. "Interoperability and Network Externalities in Electronic Payments," Research Papers in Economics 2001:7, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2001_0007
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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

    payment systems; efficiency; network externalities;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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