The Determinants of Optimal Interchange Fees in Payment Systems

Julian Wright ()

Industrial Organization from EconWPA

Abstract: A fundamental aspect of any open payment system is the interchange fee that is paid from the merchant's bank to the cardholder's bank. Using a model in which there is partial participation by heterogeneous consumers and merchants, this paper characterizes the output maximizing, profit maximizing and welfare maximizing level of such an interchange fee. It examines how the optimal level of the fee depends on costs, profits margins, pass-through coefficients, participation rates, and membership fees, as well as two different strategic effects arising from competition between merchants. It also determines the factors which drive deviations between the output maximizing, profit maximizing, and welfare maximizing interchange fees.

Keywords: payment; networks; debit; credit; cards; interchange (search for similar items in EconPapers)
JEL-codes: G21 L31 L42 (search for similar items in EconPapers)
Date: 2001-08-16
Note: Type of Document - ; pages: 46 . Department of Economics Working Paper No. 220 University of Auckland July 19, 2001
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Journal Article: The Determinants of Optimal Interchange Fees in Payment Systems (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0108001

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