The Effect of Payment Reversibility on E-commerce and Postal Quality

Christian Jaag and Christian Bach

No 46, Working Papers from Swiss Economics

Abstract: In this paper we develop a stylized model of competition between brick-and-mortar merchants and online retailers. An offline transaction, matching payment with delivery, is without risk for both the seller and the buyer. In an online transaction the seller faces the potential risk of non-payment while the buyer risks failed delivery. The effects of these two risks depend on the reversibility of payment. While traditional payment systems for e-commerce are reversible, virtual currencies like Bitcoin offer irreversible transactions. This shifts the risk from the receiver of the payment to its sender. The paper explores the effect of payment reversibility on competition between offline and online merchants and on the importance of postal quality for e-commerce. It finds that payment irreversibility may strengthen e-commerce due to reduced overall risk. Moreover, under reasonable conditions, postal operators have stronger incentives for quality since it affects volumes more strongly if payment is irreversible.

Keywords: Virtual Currencies; Bitcoin; E-Commerce (search for similar items in EconPapers)
JEL-codes: L81 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-com, nep-ict and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:chc:wpaper:0046

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