Payment Systems and Interchange Fees
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.
|Date of creation:||Apr 2001|
|Date of revision:|
|Publication status:||published as Schmalensee, Richard. "Payment Systems And Interchange Fees," Journal of Industrial Economics, 2002, v50(2,Jun), 103-122.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Richard Schmalensee, 1976. "A Model of Promotional Competition in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 43(3), pages 493-507.
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- 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 107-22, February.
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