IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v154y2023ics0014292123000399.html
   My bibliography  Save this article

Adoption of a new payment method: Experimental evidence

Author

Listed:
  • Arifovic, Jasmina
  • Duffy, John
  • Jiang, Janet Hua

Abstract

We develop a framework for studying the introduction of a new payment method in a controlled laboratory environment, where consumers (buyers) and merchants (sellers) can learn to coordinate their adoption decisions over time. The underlying game exhibits network adoption effects as emphasized by the theoretical literature. We elicit players’ beliefs about the adoption decisions of the other side of the market so that we can directly test for network effects. We investigate how the additional fixed cost of adopting the new payment method, relative to its savings on per transaction costs, affects merchant’s decisions to adopt the new payment method and how that in turn affects buyer’s adoption decisions. We find that a low fixed cost favors quick adoption of the new payment method by all participants, while for a sufficiently high fixed cost, merchants gradually learn to reject the new payment method. We also find strong evidence of network effects and that the fixed costs are important for the strong response of seller acceptance decisions to buyer adoption decisions. An evolutionary learning model provides a good characterization of the dynamic adjustment paths found in our experimental data.

Suggested Citation

  • Arifovic, Jasmina & Duffy, John & Jiang, Janet Hua, 2023. "Adoption of a new payment method: Experimental evidence," European Economic Review, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000399
    DOI: 10.1016/j.euroecorev.2023.104410
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292123000399
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2023.104410?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Klee, Elizabeth, 2008. "How people pay: Evidence from grocery store data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 526-541, April.
    2. John Bagnall & David Bounie & Kim P. Huynh & Anneke Kosse & Tobias Schmidt & Scott Schuh, 2016. "Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 1-61, December.
    3. Jack Ochs & John Duffy, 1999. "Emergence of Money as a Medium of Exchange: An Experimental Study," American Economic Review, American Economic Association, vol. 89(4), pages 847-877, September.
    4. Huynh, Kim P. & Schmidt-Dengler, Philipp & Stix, Helmut, 2014. "Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 472, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    6. Martin Dufwenberg, 2015. "Banking on experiments?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 943-971, November.
    7. Giovanna Devetag & Andreas Ortmann, 2007. "When and why? A critical survey on coordination failure in the laboratory," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 331-344, September.
    8. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    9. Sergei Koulayev & Marc Rysman & Scott Schuh & Joanna Stavins, 2016. "Explaining adoption and use of payment instruments by US consumers," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 293-325, May.
    10. Martin Dufwenberg, 2015. "Banking on experiments?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 943-971, November.
    11. Ulf Kalckreuth & Tobias Schmidt & Helmut Stix, 2014. "Choosing and using payment instruments: evidence from German microdata," Empirical Economics, Springer, vol. 46(3), pages 1019-1055, May.
    12. Anneke Kosse & Heng Chen & Marie-Hélène Felt & Valéry Dongmo Jiongo & Kerry Nield & Angelika Welte, 2017. "The Costs of Point-of-Sale Payments in Canada," Discussion Papers 17-4, Bank of Canada.
    13. Li, Bin Grace & McAndrews, James & Wang, Zhu, 2020. "Two-sided market, R&D, and payments system evolution," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 180-199.
    14. Arifovic, Jasmina & Ledyard, John, 2007. "Call market book information and efficiency," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 1971-2000, June.
    15. Schmidt-Dengler, Philipp & Stix, Helmut & Huynh, Kim P., 2014. "The Role of Card Acceptance in the Transaction Demand for Money," CEPR Discussion Papers 10183, C.E.P.R. Discussion Papers.
    16. Gabriele Camera & Marco Casari & Stefania Bortolotti, 2016. "An Experiment on Retail Payments Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 363-392, March.
    17. Arifovic, Jasmina & Ledyard, John, 2011. "A behavioral model for mechanism design: Individual evolutionary learning," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 374-395, May.
    18. Hall, Bronwyn H. & Khan, Beethika, 2003. "Adoption of New Technology," Department of Economics, Working Paper Series qt3wg4p528, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    19. Jasmina Arifovic & John Ledyard, 2012. "Individual Evolutionary Learning, Other-regarding Preferences, and the Voluntary Contributions Mechanism," Discussion Papers wp12-01, Department of Economics, Simon Fraser University.
    20. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    21. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-1095, December.
    22. Tanjim Hossain & Dylan Minor & John Morgan, 2011. "Competing Matchmakers: An Experimental Analysis," Management Science, INFORMS, vol. 57(11), pages 1913-1925, November.
    23. 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.
    24. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    25. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    26. Jasmina Arifovic & John Ledyard, 2018. "Learning to alternate," Experimental Economics, Springer;Economic Science Association, vol. 21(3), pages 692-721, September.
    27. Vivian Lei & Charles N. Noussair, 2002. "An Experimental Test of an Optimal Growth Model," American Economic Review, American Economic Association, vol. 92(3), pages 549-570, June.
    28. Angelika Welte & Jozsef Molnar, 2021. "The market for acquiring card payments from small and medium-sized Canadian merchants," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 56(2), pages 87-97, April.
    29. Wang, Zhu & Wolman, Alexander L., 2016. "Payment choice and currency use: Insights from two billion retail transactions," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 94-115.
    30. Sébastien Lotz & Françoise Vasselin, 2019. "A New Monetarist Model Of Fiat And E‐Money," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 498-514, January.
    31. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2019. "Explaining the Interplay Between Merchant Acceptance and Consumer Adoption in Two-Sided Markets for Payment Methods," Staff Working Papers 19-32, Bank of Canada.
    32. Cohen, Michael & Rysman, Marc, 2012. "Payment Choice with Consumer Panel Data," Working Paper series 148348, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
    33. John Duffy & Jack Ochs, 2002. "Intrinsically Worthless Objects as Media of Exchange: Experimental Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 637-674, August.
    34. Jasmina Arifovic & John Ledyard, 2004. "Scaling Up Learning Models in Public Good Games," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(2), pages 203-238, May.
    35. David Bounie & Abel François & Leo Van Hove, 2017. "Consumer Payment Preferences, Network Externalities, and Merchant Card Acceptance: An Empirical Investigation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 51(3), pages 257-290, November.
    36. John B. Van Huyck & Raymond C. Battalio & Richard O. Beil, 1991. "Strategic Uncertainty, Equilibrium Selection, and Coordination Failure in Average Opinion Games," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 885-910.
    37. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, September.
    38. Arifovic, Jasmina & Boitnott, Joshua F. & Duffy, John, 2019. "Learning correlated equilibria: An evolutionary approach," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 171-190.
    39. Arifovic, Jasmina & Ledyard, John, 2012. "Individual evolutionary learning, other-regarding preferences, and the voluntary contributions mechanism," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 808-823.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anufriev, Mikhail & Duffy, John & Panchenko, Valentyn, 2024. "Individual evolutionary learning in repeated beauty contest games," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 550-567.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jasmina Arifovic & John Duffy & Janet Jiang, 2017. "Adoption of a New Payment System: Theory and Experimental Evidence," Working Papers 171801, University of California-Irvine, Department of Economics.
    2. Jasmina Arifovic & John Duffy & Janet Hua Jiang, 2017. "Adoption of a New Payment Method: Theory and Experimental Evidence," Staff Working Papers 17-28, Bank of Canada.
    3. Tamás Briglevics & Scott Schuh, 2020. "This Is What's in Your Wallet...and Here's How You Use It," Working Papers 20-04, Department of Economics, West Virginia University.
    4. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2022. "Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee," Staff Working Papers 22-15, Bank of Canada.
    5. Jasmina Arifovic & John Ledyard, 2018. "Learning to alternate," Experimental Economics, Springer;Economic Science Association, vol. 21(3), pages 692-721, September.
    6. Arifovic, Jasmina & Jiang, Janet Hua, 2019. "Strategic uncertainty and the power of extrinsic signals– evidence from an experimental study of bank runs," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 1-17.
    7. John Bagnall & David Bounie & Kim P. Huynh & Anneke Kosse & Tobias Schmidt & Scott Schuh, 2016. "Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 1-61, December.
    8. Anufriev, Mikhail & Duffy, John & Panchenko, Valentyn, 2024. "Individual evolutionary learning in repeated beauty contest games," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 550-567.
    9. Martin Brown & Nicole Hentschel & Hannes Mettler & Helmut Stix, 2020. "Financial Innovation, Payment Choice and Cash Demand - Causal Evidence from the Staggered Introduction of Contactless Debit Cards," Working Papers on Finance 2002, University of St. Gallen, School of Finance.
    10. Martin Brown & Nicole Hentschel & Hannes Mettler & Helmut Stix, 2020. "Financial Innovation, Payment Choice and Cash Demand – Causal Evidence from the Staggered Introduction of Contactless Debit Cards (Martin Brown,Nicole Hentschel, Hannes Mettler, Helmut Stix)," Working Papers 230, Oesterreichische Nationalbank (Austrian Central Bank).
    11. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2019. "Explaining the Interplay Between Merchant Acceptance and Consumer Adoption in Two-Sided Markets for Payment Methods," Staff Working Papers 19-32, Bank of Canada.
    12. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Paper 334, Department of Economics, University of Pittsburgh, revised Jun 2014.
    13. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2015. "Consumer payment choice: Merchant card acceptance versus pricing incentives," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 130-141.
    14. Naoki Wakamori & Angelika Welte, 2017. "Why Do Shoppers Use Cash? Evidence from Shopping Diary Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(1), pages 115-169, February.
    15. Aurazo, Jose & Vega, Milton, 2021. "Why people use digital payments: Evidence from micro data in Peru," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(4).
    16. Anufriev, Mikhail & Arifovic, Jasmina & Ledyard, John & Panchenko, Valentyn, 2022. "The role of information in a continuous double auction: An experiment and learning model," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    17. Liu, Jia & Riyanto, Yohanes E. & Zhang, Ruike, 2020. "Firing the right bullets: Exploring the effectiveness of the hired-gun mechanism in the provision of public goods," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 222-243.
    18. Francesco Feri & Bernd Irlenbusch & Matthias Sutter, 2010. "Efficiency Gains from Team-Based Coordination—Large-Scale Experimental Evidence," American Economic Review, American Economic Association, vol. 100(4), pages 1892-1912, September.
    19. Bao, Te & Hommes, Cars & Pei, Jiaoying, 2021. "Expectation formation in finance and macroeconomics: A review of new experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    20. Alvarez, Fernando & Lippi, Francesco, 2017. "Cash burns: An inventory model with a cash-credit choice," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 99-112.

    More about this item

    Keywords

    Payment methods; Payment adoption; Network effects; Two-sided markets; Coordination problems; Experimental economics; Evolutionary learning;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000399. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.