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Fraud, investments and liability regimes in payment platforms

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  • Creti, Anna
  • Verdier, Marianne

Abstract

In this paper, we discuss how fraud losses impact the price structure chosen by a monopolistic payment platform, if merchants can invest in fraud detection technologies. We show that liability rules bias the structure of the prices charged by the platform to consumers and merchants with respect to a case in which such a responsibility regime is not implemented. If consumers are liable for fraud, the profit-maximizing price structure is neither biased in favor of consumers nor merchants. If consumers are not liable for fraud, the platform lowers the price for merchants to provide them with investment incentives. Under the zero liability rule for consumers, the profit-maximizing allocation of fraud losses maximizes social welfare.

Suggested Citation

  • Creti, Anna & Verdier, Marianne, 2014. "Fraud, investments and liability regimes in payment platforms," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 84-93.
    • Handle: RePEc:eee:indorg:v:35:y:2014:i:c:p:84-93
    DOI: 10.1016/j.ijindorg.2014.06.003
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    Cited by:

    1. Belleflamme, Paul & Johnen, Johannes, 2023. "Non-Price Strategies of Marketplaces: A Survey," LIDAM Discussion Papers CORE 2023015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Kyoung‐Soo Yoon & Jooyong Jun, 2019. "Liability And Antifraud Investment In Fintech Retail Payment Services," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 181-194, January.
    3. Berg, Nathan & Kim, Jeong-Yoo, 2022. "Optimal online-payment security system and the role of liability sharing," Economic Modelling, Elsevier, vol. 110(C).
    4. Mariotto Carlotta & Verdier Marianne, 2017. "Who Pays for Card Payments? A General Model on the Role of Interchange Fees," Review of Network Economics, De Gruyter, vol. 16(3), pages 307-349, September.
    5. Bajo-Buenestado, Raúl & Kinateder, Markus, 2019. "Armstrong meets Rochet–Tirole: On the equivalence of different pricing structures in two-sided markets," Economics Letters, Elsevier, vol. 177(C), pages 43-46.

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    More about this item

    Keywords

    Payment card systems; Interchange fees; Two-sided markets; Fraud; Liability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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