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Efficiency and Competition between Payment Instruments

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  • Farrell Joseph

    (University of California, Berkeley)

Abstract

A payment instrument that disproportionately charges merchants (as with high interchange) can take business from others that offer the two-sided customer better deals. This competitive bias arises because merchants internalize cardholders' benefits (even without merchant competition). Use of an instrument with high merchant fees also raises prices paid by other consumers, a non-pecuniary externality. While it can be allocatively efficient to tax rivals of a firm (or cooperative) with market power, competition policy urges otherwise. The competitive bias and the externality on other consumers vanish when competing payment instruments are equally costly to merchants, suggesting a simple policy benchmark.

Suggested Citation

  • Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-19, March.
    • Handle: RePEc:bpj:rneart:v:5:y:2006:i:1:n:3
    DOI: 10.2202/1446-9022.1087
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    Citations

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    Cited by:

    1. Julian Wright, 2012. "Why payment card fees are biased against retailers," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 761-780, December.
    2. Marius Schwartz & Daniel R. Vincent, 2020. "Platform Competition With Cash‐Back Rebates Under No Surcharge Rules," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 298-327, June.
    3. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department.
    4. Rochet, Jean-Charles & Wright, Julian, 2010. "Credit card interchange fees," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1788-1797, August.
    5. Frantisek Bartes & Jitka Studenikova, 2010. "Payment System Competitiveness," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 5(2), pages 93-101, December.
    6. Dragoi, Ionut Mihai, 2013. "The Interchange Fees - A Comparison between Optimal Private and Social Levels," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 24-38, March.
    7. James J. McAndrews & Zhu Wang, 2008. "The economics of two-sided payment card markets: pricing, adoption and usage," Research Working Paper RWP 08-12, Federal Reserve Bank of Kansas City.
    8. Zenger, Hans, 2011. "Perfect surcharging and the tourist test interchange fee," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2544-2546, October.
    9. Marius Schwartz & Daniel R. Vincent, 2011. "Platform Competition With User Rebates Under No Surcharge Rules," Working Papers gueconwpa~17-17-07, Georgetown University, Department of Economics.
    10. Evan Gee & Craig Peters & Jeffrey M. Wilder, 2019. "The Year in Review: Economics at the Antitrust Division, 2018–2019," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(4), pages 537-550, December.
    11. Zenger, Hans, 2010. "Perfect surcharging and the tourist test interchange fee," MPRA Paper 27004, University Library of Munich, Germany.
    12. Martikainen, Emmi & Schmiedel, Heiko & Takalo, Tuomas, 2015. "Convergence of European retail payments," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 81-91.
    13. Tan, Hongru & Chen, Xuezheng, 2024. "The no surcharge rule and its welfare implication," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1369-1384.
    14. Ron Borzekowski & Elizabeth K. Kiser & Mark D. Manuszak & Robin A. Prager, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
    15. James J. McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
    16. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.
    17. Damien Neven & Miguel Mano, 2009. "Economics at DG Competition, 2008–2009," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(4), pages 317-347, December.
    18. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
    19. Zhu Wang, 2008. "Market structure and credit card pricing: what drives the interchange?," Payments System Research Working Paper PSR WP 06-04, Federal Reserve Bank of Kansas City.

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