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Price Incentives and Consumer Payment Behaviour

Author

Listed:
  • John Simon

    (Reserve Bank of Australia)

  • Kylie Smith

    (Reserve Bank of Australia)

  • Tim West

    (Reserve Bank of Australia)

Abstract

In this paper we estimate the effect of particular price incentives on consumer payment patterns using transaction-level data. We find that participation in a loyalty program and access to an interest-free period, both of which lower the price of credit card use, tend to increase credit card use at the expense of alternative payment methods, such as debit cards and cash. Specifically, we find that a loyalty program increases the probability of credit card use by 23 percentage points and access to the interest-free period increases the probability by 16 percentage points. Interestingly, the pattern of substitution from cash and debit cards is different in each of these cases. A loyalty program reduces the probability of cash use by 14 percentage points and has little effect on debit card use, while access to the interest-free period has little effect on cash use but reduces the probability of debit card use by 19 percentage points. We find these effects to be economically significant and large enough that they can help to explain observed aggregate payments patterns. An implication is that the Reserve Bank reforms of the Australian payments system are likely to have influenced observed payment patterns.

Suggested Citation

  • John Simon & Kylie Smith & Tim West, 2009. "Price Incentives and Consumer Payment Behaviour," RBA Research Discussion Papers rdp2009-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2009-04
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    References listed on IDEAS

    as
    1. Simon, John & Smith, Kylie & West, Tim, 2010. "Price incentives and consumer payment behaviour," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1759-1772, August.
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    More about this item

    Keywords

    consumer choice; retail payment systems; price incentives; loyalty programs;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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