Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Tuesday, February 9, 2010

Pricing payment cards

Posted by D. Daniel Sokol

Özlem Bedre-Defolie (Toulouse School of Economics) and Emilio Calvano (Department of Economics, Harvard University have written on Pricing payment cards.

ABSTRACT: In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the ! structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers.

http://lawprofessors.typepad.com/antitrustprof_blog/2010/02/pricing-payment-cards.html

| Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef01287747daf0970c

Listed below are links to weblogs that reference Pricing payment cards:

Comments

Post a comment