Pricing Payment Cards
Open accessAbstract
Payment card networks, such as Visa, require merchants' banks to pay substantial "interchange" fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profit-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. In contrast to the literature we show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). These findings are robust to competition for cardholders and/or for merchants, network competition, and strategic card acceptance to attract consumers.
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In Bedre-Defolie and Calvano (2013), platforms incentives purchases for consumers who can choose the payment medium for a given transaction and load markups on merchants who cannot.
“in Bedre-Defolie and Calvano (2013), platforms incentives purchases for consumers who can choose the payment medium for a given transaction and load markups on merchants who cannot”
From Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns (2022) · cites this paper as Bedre-Defolie and Calvano (2013)
The Proof (Appendix A.2, p. 16) says consumers choose the payment instrument, higher interchange fees encourage card use, and the fees are passed through to merchants. The Timing section (p. 10) distinguishes deciding whether to purchase from deciding whether to pay by card. Thus the paper supports incentives for card use, but not the claim that platforms incentivize purchases themselves. (LLM, conf=0.82)
Experimental — accuracy not yet measuredBNPL platforms have incentives to aggressively compete to attract users and design products to increase purchase volumes.
“these results imply that BNPL platforms have incentives to aggressively compete to both (i) attract users and (ii) design their products in a way to increase purchase volumes as much as possible”
From Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns (2022) · cites this paper as Bedre-Defolie and Calvano (2013)
The concluding remarks (p. 26) say competing card schemes would like to attract consumers, which supports the user-attraction part for payment cards. But the paper studies payment cards, not BNPL platforms, and the Proof (p. 16) explicitly says its equilibrium fees do not maximize total transaction volume. It therefore does not support the claim that platforms design products to increase purchase volumes as much as possible. (LLM, conf=0.87)
Experimental — accuracy not yet measured
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Cites
Platform Competition in Two-Sided Markets
Rochet, J.-C., & Tirole, J. (2003) · Journal of the European Economic Association · doi:10.1162/154247603322493212 · Cited by 5,642 · see citing works
Chicken & Egg: Competition among Intermediation Service Providers
Caillaud, B., & Jullien, B. (2003) · The RAND Journal of Economics · doi:10.2307/1593720 · Cited by 1,799 · see citing works
The Economics of Two-Sided Markets
Rysman, M. (2009) · Journal of Economic Perspectives · doi:10.1257/jep.23.3.125 · Cited by 1,261 · see citing works
Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts
Armstrong, M., & Wright, J. (2007) · Economic Theory · doi:10.1007/s00199-006-0114-6 · Cited by 690 · see citing works
Flagged first, then by citations
Research works printed but not linked: 15
- (2006): 'Competition in Two-Sided Markets,' Rand Journal of Economics , 37(3), 668-681.
- Baxter, W. (1983): 'Bank Interchange of Transactional Paper: Legal and Economic Perspectives,' Journal of Law and Economics , 26(3), 541-588.
- Chakravorti, S. (2003): 'Theory of Credit Card Networks: A Survey of the Literature,' Review of Network Economics , 2(2), 50-68.
- Evans, D., and R. Schmalensee (2005a): Paying With Plastic: The Digital Revolution In Buying And Borrowing . MIT Press.
- Evans, D., and R. Schmalensee (2005b): 'The Economics of Interchange Fees and Their Regulation: An Overview,' a Conference Interchange Fees in Credit and Debit Card Industries: What Role for Public Authorities , pp. 4-6.
- Gans, J., and S. King (2003a): 'Approaches to Regulating Interchange Fees in Payment Systems,' Review of Network Economics , 2(2), 125-145.
- (2007): 'Competing Payment Schemes,' Journal of Industrial Economics , 55(1), 37-67.
- Laffont, J., S. Marcus, P. Rey, and J. Tirole (2003): 'Internet Interconnection and the Off-Net-Cost Pricing Principle,' The RAND Journal of Economics , 34(2), 370-390.
- Reserve Bank of Australia (2007): 'Reform of Australia's Payments System: Issues for the 2007/08 Review,' Discussion paper.
- Rochet, J. (2003): 'The Theory of Interchange Fees: A Synthesis of Recent Contributions,' Review of Network Economics , 2(2), 97-124.
- Rochet, J., and J. Tirole (2002): 'Cooperation among Competitors: Some Economics of Payment Card Associations,' The RAND Journal of Economics , 33(4), 549-570.
- Schmalensee, R. (2002): 'Payment Systems and Interchange Fees,' Journal of Industrial Economics , 50(2), 103-122.
- Weiner, S., and J. Wright (2005): 'Interchange Fees in Various Countries: Developments and Determinants,' Review of Network Economics , 4(4), 290-323.
- Weyl, E. (2009): 'Monopoly, Ramsey and Lindahl in Rochet and Tirole (2003),' Economics Letters .
- Wright, J. (2004): 'The Determinants of Optimal Interchange Fees in Payment Systems,' The Journal of Industrial Economics , 52(1), 1-26.
Cited by
Sorted by citations
The Economics of Two-Sided Markets
Rysman, M. (2009) · Journal of Economic Perspectives · doi:10.1257/jep.23.3.125 · Cited by 1,261 · see citing works
Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns
Di Maggio, M., Katz, J., & Williams, E. (2022) · Social Science Research Network · doi:10.2139/ssrn.4198320 · Cited by 15 · see citing works
- Authors
- Bedre-Defolie, Ö., & Calvano, E.
- Affiliations
- Center for Economic and Policy Research (US)
- Université de Toulouse (FR)
- Venue
- American Economic Journal: Microeconomics
- Publisher
- American Economic Association
- Published
- 2013-08-01
- Volume
- 5
- Issue
- 3
- Pages
- 206-231
- ISSN
- 1945-7669 (ISSN-L)
- 1945-7685
- OpenAlex
- W2116642403
- Cited by
- 17
- References
- 4
- Citations by year
- 2024: 1 · 2019: 1 · 2015: 3 · 2014: 1 · 2013: 2 · 2012: 2
- FWCI
- 5.93
- Type
- journal article
- Language
- en
- Open access
- green
- doi.org
- Locations
- American Economic Journal Microeconomics (publishedVersion)
- SSRN Electronic Journal (acceptedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Econstor (Econstor) (submittedVersion)
- SSRN Electronic Journal (submittedVersion)
- Cineca Institutional Research Information System (Tor Vergata University) (submittedVersion, other-oa)
- Topics
- Social Sciences › Business, Management and Accounting › Strategy and Management › Digital Platforms and Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Social Sciences › Business, Management and Accounting › Marketing › Consumer Market Behavior and Pricing
- Keywords
- payment card networks, interchange fees, pricing, merchant banks, network competition
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