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Two-sided network effects, bank interchange fees, and the allocation of fixed costs


  • Bergman, Mats

    () (Dept. of Economics, Stockholm University)


Two-sided network effects in card payment systems are analysed under different market structures, e.g., competition, one-sided monopoly, bilateral monopoly and duopoly; with and without an interchange fee; for the so-called Baxter case of non-strategic merchants. A partial ranking of market structures according to their welfare effects is provided. Fixed central (card) system costs are introduced and analysed under free entry and duopoly. It is shown that under free entry, a per-transaction distribution of fixed costs is preferrable to dividing the fixed cost in equal proportions between the paritcipants. Under duopoly, (and no entry) a fixed division of central costs will yield lower prices.

Suggested Citation

  • Bergman, Mats, 2005. "Two-sided network effects, bank interchange fees, and the allocation of fixed costs," Research Papers in Economics 2005:1, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2005_0001

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    References listed on IDEAS

    1. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 283-290.
    2. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    3. repec:cup:apsrev:v:72:y:1978:i:02:p:469-491_15 is not listed on IDEAS
    4. repec:cup:apsrev:v:88:y:1994:i:03:p:699-707_09 is not listed on IDEAS
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    Cited by:

    1. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.

    More about this item


    Two-sided markets; card payentd; payment systems; acquiring; issuing; market structure;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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