IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2019-057.html
   My bibliography  Save this paper

Two-Sided Market, R&D and Payments System Evolution

Author

Listed:
  • Ms. Grace B Li
  • James McAndrews
  • Zhu Wang

Abstract

It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a twosided market setting. We calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary significantly through the endogenous R&D channel.

Suggested Citation

  • Ms. Grace B Li & James McAndrews & Zhu Wang, 2019. "Two-Sided Market, R&D and Payments System Evolution," IMF Working Papers 2019/057, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/057
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=46619
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    4. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
    5. James J. McAndrews & Zhu Wang, 2008. "The economics of two-sided payment card markets: pricing, adoption and usage," Research Working Paper RWP 08-12, Federal Reserve Bank of Kansas City.
    6. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    7. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-588, October.
    8. Jean‐Charles Rochet & Jean Tirole, 2011. "Must‐Take Cards: Merchant Discounts And Avoided Costs," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 462-495, June.
    9. Fumiko Hayashi & Bin Grace Li & Zhu Wang, 2017. "Innovation, Deregulation, and the Life Cycle of a Financial Service Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 180-203, October.
    10. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 899-927.
    11. A. Drăgulescu & V.M. Yakovenko, 2001. "Evidence for the exponential distribution of income in the USA," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 20(4), pages 585-589, April.
    12. Nosal, Ed & Rocheteau, Guillaume, 2011. "Money, Payments, and Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016281, December.
    13. Rysman Marc & Wright Julian, 2014. "The Economics of Payment Cards," Review of Network Economics, De Gruyter, vol. 13(3), pages 303-353, September.
    14. Zhu Wang & Julian Wright, 2017. "Ad valorem platform fees, indirect taxes, and efficient price discrimination," RAND Journal of Economics, RAND Corporation, vol. 48(2), pages 467-484, May.
    15. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    16. Fumiko Hayashi & Richard J. Sullivan & Stuart E. Weiner, 2006. "A guide to the ATM and debit card industry - 2006 update," Monograph, Federal Reserve Bank of Kansas City, number 2006agttaadci2.
    17. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    18. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dr. Kyriazopoulos Georgios & Thanou Efthymia, 2020. "Mergers and Acquisitions and how they affect the Labor productivity. Evidence from the Greek Banking system," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(2), pages 1-3.
    2. Arifovic, Jasmina & Duffy, John & Jiang, Janet Hua, 2023. "Adoption of a new payment method: Experimental evidence," European Economic Review, Elsevier, vol. 154(C).
    3. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2022. "Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee," Staff Working Papers 22-15, Bank of Canada.
    4. Guerino Ardizzi & Andrea Nobili & Giorgia Rocco, 2020. "A game changer in payment habits: evidence from daily data during a pandemic," Questioni di Economia e Finanza (Occasional Papers) 591, Bank of Italy, Economic Research and International Relations Area.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhu Wang, 2019. "Two-sided Market, R&D and Payments System Evolution," 2019 Meeting Papers 833, Society for Economic Dynamics.
    2. 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.
    3. 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.
    4. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.
    5. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
    6. Rochet, Jean-Charles & Wright, Julian, 2010. "Credit card interchange fees," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1788-1797, August.
    7. John Bagnall & David Bounie & Kim P. Huynh & Anneke Kosse & Tobias Schmidt & Scott Schuh, 2016. "Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 1-61, December.
    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. Bourguignon, Hélène & Gomes, Renato & Tirole, Jean, 2019. "Shrouded transaction costs: must-take cards, discounts and surcharges," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 99-144.
    10. Marc Bourreau & Marianne Verdier, 2019. "Interchange Fees and Innovation in Payment Systems," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 129-158, February.
    11. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2011. "How do you pay? The role of incentives at the point-of-sale," Working Paper Series 1386, European Central Bank.
    12. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    13. Kay, Benjamin S. & Manuszak, Mark D. & Vojtech, Cindy M., 2018. "Competition and complementarities in retail banking: Evidence from debit card interchange regulation," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 91-108.
    14. Bolt, Wilko & Jonker, Nicole & van Renselaar, Corry, 2010. "Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1738-1744, August.
    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. Hayashi Fumiko, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
    17. Bourreau, Marc & Verdier, Marianne, 2010. "Private cards and the bypass of payment systems by merchants," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1798-1807, August.
    18. 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.
    19. Fumiko Hayashi & Stuart E. Weiner, 2005. "Competition and credit and debit card interchange fees: a cross-country analysis," Payments System Research Working Paper PSR WP 05-03, Federal Reserve Bank of Kansas City.
    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.

    More about this item

    Keywords

    WP; fixed cost; payment card; R&D; Technology Adoption; Two-Sided Market; consumer welfare; card fee; cap regulation; card adoption; cash consumer; adoption cost; Currencies; Personal income; Payment systems; Credit; Technological innovation;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2019/057. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.