Pricing Payment Cards

?zlem Bedre-Defolie and Emilio Calvano
Authors registered in the RePEc Author Service: Özlem Bedre Defolie

American Economic Journal: Microeconomics, 2013, vol. 5, issue 3, 206-31

Abstract: 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 profi t-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. 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). In general, we contribute to the theory of two-sided markets by introducing a model that distinguishes between extensive and intensive margins,thereby explaining why two-part tarif fs are useful pricing tools for platforms.

JEL-codes: D42 D85 G21 L12 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mic.5.3.206
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Citations: View citations in EconPapers (36)

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Related works:
Working Paper: Pricing payment cards (2010)
Working Paper: Pricing payment cards (2009)
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