Do Card Users Benefit From the Use of Proportional Fees?

Chun-Hui Miao

Review of Network Economics, 2014, vol. 12, issue 3, 323-341

Abstract: It has been shown recently that both card networks’ profits and consumer welfare are higher when the networks charge proportional fees than when they charge fixed per-transaction fees. In this paper, we reexamine this result in a market characterized by free entry. We find that private profitability is not always compatible with consumer welfare maximization: while card networks always benefit from the use of proportional fees, consumer welfare may get reduced. A simple calibration exercise confirms that a proportional fee could harm consumers under reasonable parameter values.

Keywords: free entry; fixed per-transaction fee; proportional fee (search for similar items in EconPapers)
JEL-codes: D4 G2 L1 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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DOI: 10.1515/rne-2012-0011

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