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Pricing Debit Card Payments Services: An IO approach

Wilko Bolt () and Alexander Tieman

WO Research Memoranda (discontinued) from Netherlands Central Bank, Research Department

Abstract: In this paper we present a theoretic framework to analyse pricing structures in debit card schemes. Card-holders value debit cards only to the extent that these are accepted by retailers, while retailers in turn benefit from a widespread usage of cards. This points to the two-sided nature of the market for debit cards. In setting its prices, the network routing switch, which in our model controls the electronic debit card network and is jointly owned by the banks, needs to consider getting both the consumers' side and retailers' side on board. We show that the 'double-monopolistic' network routing switch may want to supply consumers with cheap debit cards, deriving profits from charging a high retailer fee per trans-action. This theoretic result resembles the current practice in the Netherlands where consumers pay no transaction fee for using their debit cards. Only the retailers pay such a fee. Interestingly, this 'corner' solution carries over when analysing socially optimal prices.

Keywords: Debit card payment systems; two-sided monopolistic pricing; social optimum (search for similar items in EconPapers)
JEL-codes: G21 L10 L41 (search for similar items in EconPapers)
Date: 2003
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