Pricing payment cards

Özlem Bedre-Defolie and Emilio Calvano
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Özlem Bedre-Defolie: ESMT European School of Management and Technology
Authors registered in the RePEc Author Service: Özlem Bedre Defolie

No ESMT-10-005, ESMT Research Working Papers from ESMT European School of Management and Technology

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 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.

Keywords: payment card networks; interchange fees; merchant fees (search for similar items in EconPapers)
JEL-codes: G21 K21 L11 L31 L42 L51 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-08-11
New Economics Papers: this item is included in nep-ban, nep-com, nep-mkt and nep-net
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in American Economic Journal: Microeconomics 5(3): 206–231.

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http://static.esmt.org/publications/workingpapers/ESMT-10-005.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: Pricing Payment Cards (2013)
Working Paper: Pricing payment cards (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:esm:wpaper:esmt-10-005

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