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The price effects of reducing payment card interchange fees

Bita Shabgard () and Javier Asensio
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Bita Shabgard: Universitat de les Illes Balears

SERIEs: Journal of the Spanish Economic Association, 2023, vol. 14, issue 2, No 3, 189-221

Abstract: Abstract In this paper we empirically address the issue of whether reductions in card payment interchange fees have a significant impact on prices paid by consumers. The answer to this question is at the core of most competition policy cases and regulations that have been applied to card payment markets. Relying on Rochet and Tirole’s (RandJEcon 33:549–570, 2002) model of this sector as a two-sided market, we identify the two channels through which interchange fee reductions may influence retail prices: the impact on cards’ demand and on the merchant service charge, which may be passed through to retail prices. We use Spanish sectoral data to estimate the resulting system of equations. Our results imply that a 1% reduction in the level of the interchange fee leads to a long run 0.17% reduction in the retail price index. Such outcome is almost exclusively the result of the interchange fees being passed through as lower prices by merchants, as we find that they have a negligible impact on payment cards’ usage.

Keywords: Interchange fee; Card payment network; Two-sided markets; Retail prices (search for similar items in EconPapers)
JEL-codes: E31 G18 G21 L51 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s13209-023-00278-y

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