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Do Card Users Benefit From the Use of Proportional Fees?

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  • Miao Chun-Hui

    (Department of Economics, University of South Carolina, 1705 College St., Columbia, SC 29208, USA)

Abstract

It has been shown recently that both card networks’ profits and consumer welfare are higher when the networks charge proportional fees than when they charge fixed per-transaction fees. In this paper, we reexamine this result in a market characterized by free entry. We find that private profitability is not always compatible with consumer welfare maximization: while card networks always benefit from the use of proportional fees, consumer welfare may get reduced. A simple calibration exercise confirms that a proportional fee could harm consumers under reasonable parameter values.

Suggested Citation

  • Miao Chun-Hui, 2014. "Do Card Users Benefit From the Use of Proportional Fees?," Review of Network Economics, De Gruyter, vol. 12(3), pages 323-341, January.
    • Handle: RePEc:bpj:rneart:v:12:y:2014:i:3:p:323-341:n:1
    DOI: 10.1515/rne-2012-0011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Johannes Muthers & Sebastian Wismer, 2012. "Why Do Platforms Charge Proportional Fees? Commitment and Seller Participation," Working Papers 115, Bavarian Graduate Program in Economics (BGPE).
    2. Muthers Johannes & Wismer Sebastian, 2022. "Why Do Platforms Charge Proportional Fees? Commitment and Seller Participation," Review of Network Economics, De Gruyter, vol. 21(2), pages 83-110, August.
    3. Wismer, Sebastian, 2013. "Intermediated vs. Direct Sales and a No-Discrimination Rule," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79999, Verein für Socialpolitik / German Economic Association.
    4. Zhu Wang, 2018. "Why Do Platforms Use Ad Valorem Fees? Evaluating Two Alternative Explanations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 153-171.

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    More about this item

    Keywords

    free entry; fixed per-transaction fee; proportional fee;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • G2 - Financial Economics - - Financial Institutions and Services

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