Antitrust & Competition Policy Blog

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

Monday, March 25, 2019

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

BIN (GRACE) LI, International Monetary Fund, JAMES MCANDREWS, TNB USA Inc., and ZHU WANG, Federal Reserve Banks - Federal Reserve Bank of Richmond observe Two-Sided Market, R&D and Payments System Evolution.

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 two-sided 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.

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