The economics of two-sided payment card markets: pricing, adoption and usage

James McAndrews and Zhu Wang

No 12-06, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper provides a new theory for two-sided payment card markets. Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Analyzing adoption and usage externalities among heterogeneous consumers and merchants, our theory derives the equilibrium card adoption and usage pattern consistent with empirical evidence. Our analysis also helps explain the card pricing puzzles, particularly the high and rising merchant (interchange) fees. Based on the theoretical framework, we discuss socially desirable payment card fees as well as the interchange fee cap regulation.

Keywords: Financial markets; Payment systems (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-com, nep-mic and nep-net
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Citations: View citations in EconPapers (5)

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Working Paper: The economics of two-sided payment card markets: pricing, adoption and usage (2008)
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