Price cap regulation in a two-sided market: Intended and unintended consequences

Zhu Wang

International Journal of Industrial Organization, 2016, vol. 45, issue C, 28-37

Abstract: This paper studies intended and unintended consequences of price cap regulation in the two-sided payment card market. The recent U.S. debit card regulation was intended to lower merchants' card acceptance costs by capping interchange fees at the issuer cost, but for small-ticket transactions the interchange fee instead rose post-regulation. To address the puzzle, I construct a two-sided market model and show that card demand externalities between large-ticket and small-ticket transactions rationalize card networks' pricing response. Based on the model, I provide a welfare assessment of the issuer cost-based interchange regulation and discuss alternative regulatory approaches.

Keywords: Price cap regulation; Two-sided market; Demand externalities (search for similar items in EconPapers)
JEL-codes: D4 G2 L5 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:45:y:2016:i:c:p:28-37

DOI: 10.1016/j.ijindorg.2015.12.004

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