Private cards and the bypass of payment systems by merchants

Marc Bourreau and Marianne Verdier

Journal of Banking & Finance, 2010, vol. 34, issue 8, 1798-1807

Abstract: This paper studies the incentives of a merchant to bypass a payment platform by issuing private cards. In our model, a payment platform allocates the total cost of a card transaction between a monopolistic issuer and a monopolistic acquirer by choosing an "interchange fee". We determine how the level of the interchange fee impacts a merchant's decision to issue private cards, if there are strategic interactions between merchants. We prove that the payment platform can only deter entry by lowering the level of the interchange fee. If the payment platform chooses to accommodate entry, we find that the total user surplus increases, but that entry is beneficial to social welfare only if the entry cost is sufficiently low.

Keywords: Payment; card; systems; Interchange; fee; Two-sided; markets; Private; cards (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00280-5
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Private cards and the bypass of payment systems by merchants (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:8:p:1798-1807

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().