IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/8256.html
   My bibliography  Save this paper

Payment Systems and Interchange Fees

Author

Listed:
  • Richard Schmalensee

Abstract

In a typical bank credit card transaction, the merchant's bank pays an interchange fee, collectively determined by all participating banks, to the cardholder's bank. This paper shows how the interchange fee balances charges between cardholders and merchants under imperfect competition. The privately optimal fee depends mainly on differences between cardholders' and merchants' banks, not their collective market power. In a non-extreme case, the profit-maximizing interchange fee also maximizes total output and producers' plus consumers' surplus. There is no economic basis for favoring proprietary payment systems, which do not need interchange fees to balance charges, over the cooperative bank card systems.

Suggested Citation

  • Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8256
    Note: IO
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w8256.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Richard Schmalensee, 1976. "A Model of Promotional Competition in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 43(3), pages 493-507.
    2. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    3. 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.
    4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
    Full references (including those not matched with items on IDEAS)

    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. Paulson Gjerde, Kathy A. & Slotnick, Susan A., 2004. "Quality and reputation: The effects of external and internal factors over time," International Journal of Production Economics, Elsevier, vol. 89(1), pages 1-20, May.
    2. Fletcher, Stanley M. & Nadolnyak, Denis A., 2005. "Accommodating Imperfect Competition in A Model of World Peanut Trade," 2005 Annual meeting, July 24-27, Providence, RI 19460, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Rodney Beard, 2015. "N-Firm Oligopoly With General Iso-Elastic Demand," Bulletin of Economic Research, Wiley Blackwell, vol. 67(4), pages 336-345, October.
    4. Kotchen, Matthew J. & Salant, Stephen W., 2011. "A free lunch in the commons," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 245-253, May.
    5. Jie Ren & Jar-Der Luo & Ke Rong, 2020. "How Do Venture Capitals Build Up Syndication Ecosystems for Sustainable Development?," Sustainability, MDPI, vol. 12(11), pages 1-14, May.
    6. Khiaonarong, Tanai, 2003. "Payment systems efficiency, policy approaches, and the role of the central bank," Bank of Finland Research Discussion Papers 1/2003, Bank of Finland.
    7. Estelle Malavolti, 2016. "Single Till or Dual Till at airports: a Two-Sided Market Analysis," Post-Print hal-01406372, HAL.
    8. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    9. Rinaldo Brau & Carlo Carraro, 2011. "The design of voluntary agreements in oligopolistic markets," Journal of Regulatory Economics, Springer, vol. 39(2), pages 111-142, April.
    10. Fanti, Luciano & Gori, Luca, 2013. "Efficient bargaining versus right to manage: A stability analysis in a Cournot duopoly with trade unions," Economic Modelling, Elsevier, vol. 30(C), pages 205-211.
    11. Bogetoft, Peter & Nielsen, Kurt, 2003. "Yardstick Based Procurement Design In Natural Resource Management," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25910, International Association of Agricultural Economists.
    12. Bassanini, Anna & Pouyet, Jerome, 2005. "Strategic choice of financing systems in regulated and interconnected industries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 233-259, February.
    13. Roussey, Ludivine & Soubeyran, Raphael, 2018. "Overburdened judges," International Review of Law and Economics, Elsevier, vol. 55(C), pages 21-32.
    14. Chakravorti Sujit, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-19, June.
    15. Carlos Jiménez-Angueira & Nathan Stuart, 2015. "Relative performance evaluation, pay-for-luck, and double-dipping in CEO compensation," Review of Quantitative Finance and Accounting, Springer, vol. 44(4), pages 701-732, May.
    16. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    17. van der Heijden, Eline & Potters, Jan & Sefton, Martin, 2009. "Hierarchy and opportunism in teams," Journal of Economic Behavior & Organization, Elsevier, vol. 69(1), pages 39-50, January.
    18. Carpenter, Jeffrey P. & Bowles, Samuel & Gintis, Herbert, 2006. "Mutual Monitoring in Teams: Theory and Experimental Evidence on the Importance of Reciprocity," IZA Discussion Papers 2106, Institute of Labor Economics (IZA).
    19. Hans K. Hvide & Benjamin F. Jones, 2018. "University Innovation and the Professor's Privilege," American Economic Review, American Economic Association, vol. 108(7), pages 1860-1898, July.
    20. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.

    More about this item

    JEL classification:

    • L - Industrial Organization

    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:nbr:nberwo:8256. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.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.